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5 Top-Performing Small-Cap Growth Funds in Q3

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All the key indexes reached record highs during the third quarter. Even the key small-cap index, Russell 2000, hit record high levels. Also, the index is up 11.4% so far this year. Optimism surrounding Trump’s tax overhaul policies has made small-cap growth funds a favorable investment choice. Though small-cap growth funds are believed to have a higher level of volatility compared to their large and mid-cap counterparts, these show greater growth potential in a low-tax environment.

Trump’s Tax Reform in Focus

The Russell 2000 index of small-caps was up 5.4% in the third quarter. After hitting a low for the year on Aug 21, the index moved north as the Trump administration reinforced its push for a major corporate tax overhaul by the end of December. Trump has urged the Congress to move fast with the lowering of corporate taxes and recently held a bipartisan group of House members at the White House to discuss a tax deal.

While a low corporate tax will benefit businesses of all sizes, small companies will see maximum improvement in the bottom line. This is because, unlike top-tier companies, these are unable to shift cash to overseas jurisdiction to avoid hefty domestic tax rates. Companies on the Russell 2000 index pay a median tax rate of 31.9%, whereas multinationals on the S&P 500 shell out a median tax rate of 28%. (Read More: Wall Street Finishes Q3 at Record High: Top 5 Gainers)

The Trump-led administration is expected to control both individual and business taxation. These include limiting mortgage interest payments for homeowners, eliminating state and local tax deductions as well as the ability to deduct interest for small businesses.

Further, new proposals related to the full expensing for small-cap companies are likely. These proposals aim to extend deductions on investments made by small businesses on new facilities and equipment.

Buy These 5 Small-Cap Growth Mutual Funds

The Russell 2000 Index gained following optimism that key Republican congressional leaders and President Trump’s top associates are working toward a tax reform framework. In the current scenario, small-cap mutual funds with a strong growth potential will draw investor attention. Such funds posted encouraging year-to-date and one-year annualized returns of 17.5% and 22.2%, respectively.

In this context, we have highlighted five small-cap mutual funds that possess above-average growth prospects and have either a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). These also have impressive third-quarter and one-year annualized returns. Moreover, these funds have a low expense ratio and their minimum initial investment is within $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

MassMutual Select Small Cap Growth Equity R5 (MSGSX - Free Report) seeks capital growth for the long run. MSGSX invest the lion’s share of its assets in equity securities of those companies, whose market-cap fall within the range of the Russell 2000 Index or the S&P SmallCap 600 Index. MSGSX may also invest around one-fifth of its assets in foreign and emerging market securities.

MSGSX has third-quarter and one-year annualized returns of 5.1% and 22.1%, respectively, and an expense ratio of 1.32% compared with the category average of 1.36%. The fund has a Zacks Mutual Fund Rank #1.

Fidelity Small Cap Growth (FCPGX - Free Report) invests the majority of its assets in equity securities of small-cap companies. The fund invests both in domestic and foreign companies, which Fidelity Management & Research Company (FMR) perceives as having significant growth prospects. FCPGX invests in both U.S. and non-U.S. companies.

FCPGX has third-quarter and one-year annualized returns of 3% and 28.1%, respectively, and an expense ratio of 1.07% compared with the category average of 1.36%. The fund has a Zacks Mutual Fund Rank #2.

Invesco Small Cap Discovery Y seeks growth of capital for the long run. VISCX invests a bulk of its assets in securities of small-cap companies which are expected to have above-average growth prospects. The fund may also invest around one-fourth of its assets in securities of foreign companies.

VISCX has third-quarter and one-year annualized returns of 3.3% and 22.5%, respectively, and an expense ratio of 1.11% compared with the category average of 1.36%. The fund has a Zacks Mutual Fund Rank #2.

Franklin Small Cap Growth R (FSSRX - Free Report) invests a bulk of its assets in common stocks of those small-cap companies whose market-cap is either lower than $1.5 billion or from the biggest company on the Russell 2000 Index, whichever is higher. FSSRX seeks appreciation of capital for the long run. 

FSSRX has third-quarter and one-year annualized returns of 5.2% and 13.9%, respectively, and an expense ratio of 1.33% compared with the category average of 1.36%. The fund has a Zacks Mutual Fund Rank #2.

Hartford Small Company HLS Fund IA (HIASX - Free Report) seeks appreciation of capital. HIASX primarily invests its assets in common stocks issued by small-capitalization companies. The fund may also invest almost one-fifth of its assets in securities of non-U.S. issuers. Small capitalization companies are those whose market capitalization fall within the collective range of the Russell 2000 and S&P SmallCap 600 indices.

HIASX has third-quarter and one-year annualized returns of 5.4% and 20.9%, respectively, and an expense ratio of 0.76% compared with the category average of 1.36%. The fund has a Zacks Mutual Fund Rank #2.

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