Microcap funds invest in stocks of exceptionally tiny companies - typically, those whose market capitalization is $300 million or less. Market capitalization is a stock’s current share price multiplied by the number of shares outstanding.

Because of the added risk involved in tiny companies, you may feel more comfortable investing in funds. If you prefer to invest in an actively managed portfolio, there are plenty of specialty microcap funds to choose from.

Before you decide to buy a microcap fund, however, keep in mind that even if your fund finds a successful company, it will probably only hold onto it for a relatively short time. As companies grow above a certain size, most funds will require managers to sell shares, in order to reinvest in smaller companies within the target market cap.

Unfortunately, that's the downside to microcap funds - you miss out on the full appreciation potential that tiny companies offer. Once a company graduates to small- or mid-cap status, your fund will most likely have to sell it.