Top 5 Small Cap Mutual Funds (Feb. 2011)

With the economy on track for a recovery, this is the best time to add small cap stocks to a well diversified portfolio. Not only are these stocks attractively priced at this time, they are also poised to gain from the momentum of surging markets. Safer investment options such as bonds and large caps would fall out of favor at this point with investors willing to take on higher risk instruments such as small caps in search of higher gains. Small-cap funds are the best route to enter this category since they hold widely diversified portfolios of carefully selected stocks.

Below we will share with you 5 top rated small-cap mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect these mutual funds to outperform their peers in the future.

T. Rowe Price Diversified Small Cap Growth (PRDSX) seeks long-term capital growth. The majority of the fund’s assets are invested in small companies which are included in the MSCI US Small-Cap Growth Index. The fund’s top 25 holdings do not represent a significant share of total assets. This small-cap mutual fund returned 33.5% over the last one year period.

The small-cap mutual fund has a minimum initial investment of $2,500 and an expense ratio of 1.25% compared to a category average of 1.55%.

Waddell & Reed Small Cap A (UNSAX) invests at least 80% of its assets in domestic and foreign small-cap companies. The fund focuses on acquiring common stocks of companies which are new entrants, particularly those entering growing sectors. This small-cap mutual fund has a three year annualized return of 6.57%.

Gilbert Scott is the fund manager has managed this small-cap mutual fund since 2003.

Fidelity Series Small Cap Opportunities Fund (FSOPX) seeks capital growth. The majority of the fund’s assets are invested in small-cap companies. It seeks to acquire common stocks, both domestic and foreign, which may be growth or value stocks. This small-cap mutual fund returned 32.91% over the last one year period.

As of October 2010, this small-cap mutual fund held 194 issues, with 3.31% of its total assets invested in Fidelity Revere Str Tr.

Buffalo Small Cap (BUFSX) invests heavily in common, preferred stocks and related convertible securities of domestic small-cap companies. Not more than 20% of its assets may be invested in ADRs and foreign securities which are traded on U.S. stock exchanges. This small-cap mutual fund has a ten year annualized return of 9.61%.

The small-cap mutual fund has a minimum initial investment of $2,500 and an expense ratio of 1.01% compared to a category average of 1.55%.

Homestead Small Company Stock (HSCSX) seeks long-term capital appreciation. The fund invests heavily in undervalued stocks of small companies with significant growth potential. This small-cap mutual fund has a five year annualized return of 8.57%.

Stuart E. Teach is the fund manager has managed this small-cap mutual fund since 1998.

To view the Zacks Rank and past performance of all small-cap mutual funds, then click here.

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