While most investors are aware of the long-term benefits of including large-cap stocks within an investment mix, small-cap stocks are often overlooked as a beneficial allocation. Companies that generate revenue between $300 million and $2 billion annually do not have the same longstanding reputation of large- or giant-cap companies, nor do they provide the same level of consistent earnings through dividend payouts and steady stock-price appreciation. However, small-cap company stocks offer growth potential not easily found in large-cap holdings alone. Over time, small-cap stocks tend to outperform other market capitalization categories in return on investment (ROI).

Although adding small market capitalization companies to an otherwise diversified equity portfolio provides unique growth opportunities to investors, risks are inherent with lesser-known organizations. Volatility is a given with small-cap stocks, as broad market movement can have a more pronounced effect on earnings and stock price than it would on more stable, larger enterprises. Similarly, small-cap companies do not provide investors with the same depth of research information or analysis as their larger counterparts, making it difficult to understand industry position and true growth potential.

Investors can mitigate the risks inherent to small-cap company stock by diversifying holdings across a range of small-cap organizations. This is most efficiently done by purchasing mutual funds with strong management teams, relatively low expenses and a specific focus on small-cap growth holdings.

T. Rowe Price New Horizons Fund

The T. Rowe Price New Horizons Fund has an inception date of 1960, and seeks to provide investors with long-term capital growth. The fund's managers invest the majority of the fund's $15.66 billion assets in a diversified group of small, emerging growth companies that are early in their business life cycle, before they are recognized generally by the investment community. The fund has the flexibility to invest in domestic and foreign issuers, and it may hold some equity securities of companies that provide accelerated earnings growth due to new products, structural economic shifts or reorganized management teams. As of December 2015, the fund has generated a 10-year annualized return of 10.46%.

The T. Rowe Price New Horizons Fund primarily holds equity securities of companies located within the United States, but it provides some exposure to developed markets in Europe at 2.15% and emerging markets in Asia at 2.75%. The heaviest weighting of small-cap growth companies held within the fund falls into the technology sector, making up 22.61% of the portfolio, followed by consumer cyclical stocks at 20.83%, health care stocks at 19.21% and industrial stocks at 18.72%. Top holdings within the fund include SS&C Technologies Holdings at 2.63%, O'Reilly Automotive at 2.6%, Restoration Hardware at 1.79% and DexCom at 1.75%. The fund has an expense ratio of 0.79%, and it is a no-load mutual fund.

Emerald Growth Fund

The Emerald Growth Fund was established in 1992, and seeks to provide investors with long-term growth through capital appreciation. Most of the fund's $792.11 million assets are held in common, preferred and convertible stocks of companies with growth characteristics. The fund's managers are not limited in terms of market capitalization, industry or region, but they focus investments on high-growth organizations. As of December 2015, the mutual fund has generated a 10-year annualized return of 9.26%.

The Emerald Growth Fund invests the lion's share of its fund assets in domestic growth companies, providing little exposure to foreign issuers. Small-cap companies make up the largest weighting within the investment mix at 47.19%, followed by micro-cap stocks at 40.49% and mid-cap stocks at 12.32%. Technology companies make up the greatest industry weighting at 26.32%, but the fund also includes health care stocks at 19.38%, financial services stocks at 15.87% and consumer cyclical stocks at 14.89%. Top holdings include EPAM Systems at 2.2%, Bank of the Ozarks at 1.93%, Imperva at 1.85% and Acadia Healthcare Company at 1.84%. The mutual fund has an expense ratio of 1.29%, and investors are charged an upfront sales load of 4.75% when they purchase shares.

Wilshire Small Company Growth Portfolio

The Wilshire Small Company Growth Portfolio was launched in 1992, and seeks to provide investment results similar to the small-cap subcategory of the Wilshire 5000 Index. The fund's managers invest the majority of its $29.24 million assets in publicly traded common stock of companies located within the United States with a market capitalization of no more than $4 billion at the time of purchase. Fund managers focus on companies with above-average earnings, sales growth or retention of earnings based on an analysis of price-to-earnings (P/E) ratios. As of December 2015, the mutual fund has generated a 10-year annualized return of 7.18%.

Fund managers with the Wilshire Small Company Growth Portfolio diversify holdings across a range of industries, including health care stocks at 21.98%, consumer cyclical stocks at 20.61%, technology industry stocks at 19.08% and industrial sector stocks at 12.99%. Top holdings within the fund include Maximum at 2.82%, PrivateBancorp at 2.28%, WageWorks at 2.25% and Ellie Mae t 2.21%. The mutual fund has an expense ratio of 1.5%, and individuals can invest without being assessed an upfront or deferred sales load.

Oppenheimer Discovery Fund

The Oppenheimer Discovery Fund has an inception date of 1986, and fund managers seek to provide capital appreciation for the long term. The fund's $2.08 billion assets are primarily invested in common stocks of companies headquartered within the United States that have favorable growth characteristics. The fund focuses investments on small-cap companies with a market capitalization of no more than $3 billion at the time of purchase. As of December 2015, the fund has generated a 10-year annualized return of 8.44%.

While fund managers with the Oppenheimer Discovery Fund do not provide regional diversification within the fund, assets are spread across multiple industries. Technology stocks make up 29.65% of the investment mix, followed by health care industry stocks at 20.19%, consumer cyclical stocks at 19.27% and industrial sector stocks at 11.65%. Top holdings include Monolithic Power Systems at 2.34%, the Ultimate Software Group at 2.31%, Proofpoint at 2.27% and Tyler Technologies at 2.24%. The mutual fund has an expense ratio of 1.1%, and investors are charged an upfront sales load of 5.75% when they purchase shares.

Fidelity Small Cap Growth Fund

This fund was established in 2004, and fund managers seek to provide investors with capital appreciation for the long term. A minimum of 80% of the fund's $1.82 billion assets are invested in common stock of companies with small-market capitalizations that also possess above-average growth potential. Both domestic and foreign issuers may be included in the investment mix. As of December 2015, the mutual fund has generated a 10-year annualized return of 8.2%.

Currently, the Fidelity Small Cap Growth Fund offers little exposure to foreign issuers, but it does diversify holdings in terms of industry. Health care stocks make up the largest sector weighting within the fund at 27.56%, followed by technology companies at 26.4%, industrial stocks at 17.93% and consumer cyclical stocks at 17.56%. Top company holdings within the fund include 2U at 2.4%, Global Payments at 1.38%, Huron Consulting Group at 1.35% and G-III Apparel Group at 1.28%. The fund has an expense ratio of 1.22%, and it assesses an upfront sales load of 5.75% when investors purchase shares.