Small-cap funds are a type of mutual fund or exchange-traded fund (ETF) that focuses on investing in companies with relatively small market capitalizations. Market capitalization refers to the total value of a company's outstanding shares of stock and is calculated by multiplying the share price by the number of shares.

Small-cap funds specifically target companies that fall within the lower range of market capitalization when compared to larger, more established companies. These funds invest in companies that are often considered to have higher growth potential but also come with higher risks due to their size and potentially less-established track records.

Investing in small-cap funds can offer the potential for substantial returns over the long term, as smaller companies have room to grow and capture market share. However, they can also be more volatile and prone to market fluctuations, making them riskier than investments in larger, more established companies.

Small-cap funds are often favored by investors seeking diversification within their investment portfolios, as they offer exposure to companies at different stages of development and industries. These funds can provide opportunities for investors to participate in emerging trends and innovations, but they require careful consideration of risk tolerance and a longer investment horizon due to the potential for greater volatility.