Smaller companies funds focus on businesses with relatively low market capitalisations, typically those companies that are members of the FTSE Small Cap and FTSE Fledgling indices. Companies listed on the Alternative Investment Market (Aim) also feature in investment portfolios.
Generally, smaller companies can be heading in two directions - they may be newer, fast-growing companies, or they may be yesterday's fallen angels. In both cases, the risks are likely to be greater than with larger and better-established companies.
Smaller companies tend do well at times of economic expansion, when it is easier to grow revenues and funding is more readily available. They receive less coverage by stockbrokers and analysts, meaning that there is more potential mispricing for skilled investors to exploit.
However, it also means that smaller companies require greater independent research than larger companies. The rewards can be significant if a fund manager picks the right companies.
The fund managers behind our 10 Rated Funds may take a general approach, or prioritise different types of company when investing - such as technology, or high growth, or dividend-paying. For those willing to take greater risks, private equity trusts can also be an option.