Large, Medium, Small and Micro-Cap Funds

Some mutual fund companies have funds based on the market cap of the companies that make them up. If you're looking to get in on the next big thing, micro-cap funds may be your pleasure because they are made up of companies whose capitalization has not reached $100 million. Chances are, a micro-cap is going to grow! But it can go either way: either the companies grow and become small, medium and then large-cap corporations, or they fail miserably and lie wailing in the dust. Webvan, a one-time S.F. Bay area online grocery delivery service springs to mind. It was a great idea, but its execution suffered and it went belly up in a matter of months.

The nice thing about choosing a micro-cap or small-cap mutual fund is that it's not one company you're basing your investment on, but a whole group of small companies. The risk is spread: it's highly unlikely they'll all hit the dirt at the same time. But, the risk still exists in that your money isn't buying shares of hefty long-termers like McDonalds.

It's unwise to buy a micro-cap or small-cap fund of a company that once was a large-cap corporation because corporations tend to either grow or die. If the one under consideration has grown and is now on the wane, it's a bad risk for the individual investor. If they really want to revive the old dog, let the company board do some fund raising first rather than risking your dough.

If you want to go with a micro-cap fund, as you should with any investment, make sure you base your decision on things like P/E ratios and past performance. Investing is no place for purely emotional decisions, so if you really want to support fair trade coffee but the fund you're considering has lost money year after year, content yourself with buying plenty of free trade coffee and put your investment money someplace where it can grow. You're not doing anyone any favors by going bust.

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