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Small Cap Mutual Funds

Small-cap mutual funds invest in smaller companies, typically ranked in the bottom 250 in market capitalisation. They promise potentially high returns but...

Small-cap mutual funds invest in smaller companies, typically ranked in the bottom 250 in market capitalisation. They promise potentially high returns but carry significant risk due to their volatility. These funds are suitable for aggressive investors seeking high-growth opportunities.

List of Best Small Cap Funds in India

Fund Name
AUM
3Y Returns
NAV

About Small Cap Mutual Funds 

Mutual funds that invest primarily in companies with a market capitalisation below Rs. 5000 crore are called small-cap mutual funds. Such companies are usually ranked 251 and onwards in terms of market cap on Indian stock exchanges like the NSE and BSE.  

Many new investors are often attracted to the high returns projected by small-cap funds. However, you must remember that small-cap companies are often volatile and vulnerable to major downturns in the market.  

Hence, a 3-year or 5-year annualised return may not be able to fully capture the true value of the small-cap funds, especially for investors who view their mutual funds as an investment of a 10-15 year timeline or more. 

How Do Small-Cap Mutual Funds Work? 

Small-cap mutual funds pool money from investors and invests mainly in companies rated 251st or lower by their total market capitalisation, as defined by SEBI. A small-cap fund must have at least 65% of its portfolio invested in small-cap equities. 

Here's how these funds work: 

  • Stock identification: The fund manager identifies companies ranked 251st onwards based on market capitalisation. 

  • Fundamental analysis: Companies are then evaluated based on their earnings growth, revenue trends, return ratios, debt levels, cash flows, and management quality. 

  • Growth potential assessment: Fund managers look for scalable business models, competitive positioning, and industry tailwinds that may support long-term expansion. 

  • Portfolio diversification: Investments are spread across multiple sectors and typically 40–80 stocks to manage company-specific risk. 

  • Active monitoring: Stocks are reviewed regularly. Holdings may be increased, reduced, or exited depending on financial performance and market conditions. 

  • NAV movement: The fund’s Net Asset Value (NAV) changes daily based on the combined market value of its holdings. 

Small-cap stocks are more vulnerable to economic cycles and liquidity constraints. Hence, these funds have more volatility than large-cap or multi-cap funds. 

Top 10 Small Cap Mutual Funds

The following are the top Small-Cap Funds in India:

Name AUM CAGR (3Y) ↓ Expense Ratio Absolute Returns (1Y)
Bandhan Small Cap Fund 19,266.54 32.19 0.47 12.20
ITI Small Cap Fund 2,672.67 26.95 0.42 9.12
Invesco India Smallcap Fund 9,008.55 26.63 0.40 12.07
Mahindra Manulife Small Cap Fund 3,994.87 25.80 0.44 10.75
Nippon India Small Cap Fund 65,812.16 22.44 0.64 7.73
Sundaram Small Cap Fund 3,285.08 22.10 0.82 12.77
DSP Small Cap Fund 16,135.31 21.75 0.80 12.05
Edelweiss Small Cap Fund 5,369.04 21.58 0.42 8.83
Bank of India Small Cap Fund 1,829.19 21.19 0.53 5.58
Quant Small Cap Fund 27,384.03 21.10 0.81 4.77

Bandhan Small Cap Fund

Bandhan Small Cap Fund is managed by Manish Gunwani, Ritika Behera, Gaurav Satra, and Kirthi Jain and was launched on 26 February 2020. It is benchmarked against the S&P BSE 500 index. The fund aims to create a diversified portfolio within the small-cap space by following a three-pillar stock selection strategy focused on quality businesses, strong growth potential, and reasonable valuations. It has an expense ratio of 0.47%, indicating moderate fund management costs compared to peers.   

ITI Small Cap Fund

ITI Small Cap Fund scheme is managed by Dhimant Shah and Rohan Korde and was launched on 17 February 2020. It is benchmarked against the S&P BSE 500 index. The fund seeks to achieve capital appreciation by mainly investing in equity and equity-related securities of small-cap companies, although there is no guarantee that the investment objective will be met. It charges an expense ratio of 0.42%, which is relatively low and helps improve net investor returns.  

Invesco IndiaSmallcapFund

Invesco India Smallcap Fund is managed by Taher Badshah and Aditya Khemani and was launched on 30 October 2018. It is benchmarked against the S&P BSE 500 index. The fund aims to deliver capital appreciation by primarily investing in shares of small-cap companies. It has an expense ratio of 0.40%, making it one of the more cost-efficient options in this category. 

Mahindra Manulife Small Cap Fund

Mahindra Manulife Small Cap Fund is managed by Krishna Sanghavi and Vishal Jajoo and was launched on 14 December 2022. It is benchmarked against the S&P BSE 500 index. The fund aims to achieve long-term capital appreciation by investing in a diversified portfolio of equity and equity-related securities of small-cap companies, though there is no assurance that the objective will be fully realised. It carries an expense ratio of 0.44%, reflecting reasonable management expenses. 

Nippon India Small Cap Fund

Nippon India Small Cap Fund is managed by Samir Rachh, Kinjal Desai, Divya Sharma, and Lokesh Maru and was launched on 16 September 2010. It is benchmarked against the S&P BSE 500 index. The fund’s primary objective is to achieve long-term capital appreciation by mainly investing in equity and equity-related instruments of small-cap companies, while its secondary objective is to generate steady returns through investments in debt and money market securities. It shows a higher expense ratio of 0.64%, which may slightly reduce overall returns despite its large AUM.

Sundaram Small Cap Fund

Sundaram Small Cap Fund is overseen by fund manager Rohit Seksaria and was launched on 1 January 2013. It uses the S&P BSE 500 as its benchmark. The fund aims to generate capital appreciation by primarily investing in a diversified portfolio of companies that are typically classified as small-cap stocks. It has an expense ratio of 0.82%, placing it among the higher-cost funds in the segment.

DSP Small Cap Fund

DSP Small Cap Fund is managed by Vinit Sambre and was launched on 14 June 2007, with the S&P BSE 500 serving as its benchmark. The fund’s main objective is to achieve long-term capital growth by investing largely in equity and equity-related securities of small-cap companies. At times, the fund manager may also invest in other equity or related instruments to help maintain an optimal portfolio structure. It also charges a relatively high expense ratio of 0.80%, which investors should consider alongside performance.

Edelweiss Small Cap Fund

Edelweiss Small Cap Fund is managed by Trideep Bhattacharya, Dhruv Bhatia, and Raj Koradia and was launched on 7 February 2019, with the S&P BSE 500 as its benchmark. Its primary aim is to achieve long-term capital appreciation by investing mainly in equity and equity-related securities of small-cap companies. It maintains a lower expense ratio of 0.42%, supporting better cost efficiency for investors. 

Bank of India Small Cap Fund

Bank of India Small Cap Fund is managed by Alok Singh and Nav Bhardwaj and was launched on 19 December 2018, with the S&P BSE 500 as its benchmark. The fund aims to deliver long-term capital appreciation by investing mainly in equity and equity-related securities of small-cap companies. However, there is no guarantee that the stated investment objective will be achieved. It has an expense ratio of 0.53%, representing moderate management costs. 

Quant Small Cap Fund

Quant Small Cap Fund is managed by Sanjeev Sharma, Ayusha Kumbhat, Ankit A. Pande, Yug Tibrewal, Sameer Kate, Sandeep Tandon, and Varun Pattani, and it was launched on 1 January 2013 with the S&P BSE 500 as its benchmark. The fund’s primary objective is to achieve capital appreciation and offer long-term growth by investing in a portfolio of small-cap companies. However, there is no guarantee that the investment objective will be met. It carries an expense ratio of 0.81%, which is on the higher side within the small-cap fund category.

Who Should Invest in Small-Cap Mutual Funds?

Small-cap mutual funds are best suited to investors who are familiar with volatility and long-term market cycles, including: 

  1. Investors With a High Risk Appetite: These funds experience stronger price volatility than large-cap or mid-cap funds. They are appropriate for investors who are willing to accept short-term losses in order to achieve long-term growth. 

  1. Long-Term Growth Seekers (7+ Years): Small-cap funds are better suited to investors with a minimum investment horizon of seven years. A longer time span enables entities to expand and more effectively handle market downturns. 

  1. Investors Looking to Diversify Their Equity Portfolio: Allocating a share of equity exposure to small-cap funds can boost the growth potential of a diversified portfolio that already includes large- and mid-cap funds. 

  1. Experienced or Informed Investors: Given the elevated risk and volatility, investors who are familiar with equity market dynamics or who regularly monitor market trends may be better positioned to stay invested through periods of drawdown. First-time or conservative investors are typically advised to limit their exposure or focus on more stable categories first. 

  1. Investors With Adequate Time Horizon and Financial Plan: Investors who do not need the invested capital for at least 7–10 years and can withstand interim volatility may benefit more from the small-cap segment’s growth potential. 

How To Invest in Small-Cap Funds on Angel One?

Investing in the small-cap Mutual Fund is hassle-free when done through your Angel One account. You just have to follow these simple steps:  

  • Step 1: Log in to your Angel One account.  

  • Step 2: Choose a small-cap fund that suits your needs and risk profile. You can learn more about each small-cap fund on the Angel One app. Things to consider at this stage are: 

  1. Search for the fund you want to invest in. 

  1. Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in.  

  1. You can also calculate the potential returns using the calculator. 

  1. Evaluate the fund’s level of risk, its ratings, and its expense ratio. 

  • Step 3: Once you finalise the small-cap fund(s) you want to invest in, open your Angel One account, go to the Mutual Funds section, and look for it. 

Decide whether you want to invest via SIP or make a one-time investment 

Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode. 

After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments. 

Features of Small-Cap Mutual Funds 

  1. High Allocation to Small-Cap Equities: According to SEBI requirements, small-cap mutual funds must invest at least 65% of their total assets in small-cap stocks. The remaining allocation may be invested in mid-cap, large-cap, cash, or debt instruments, depending on the fund strategy. 

  1. Higher Price Volatility: Small-cap stocks typically experience stronger price swings than large-cap stocks. Changes in revenue, industry outlook, and liquidity constraints can all have a substantial influence on fund NAV. 

  1. Growth-Oriented Portfolio Strategy: Small-cap mutual funds often target companies in the early or expansion stages of their growth. The portfolio may comprise enterprises with scalable business models and a presence in emerging markets. 

  1. Longer Investment Horizon Suitability: Due to higher volatility, these funds are commonly structured for investors with a longer investment horizon, allowing time to absorb market fluctuations. 

Advantages of Small-Cap Mutual Funds 

  1. Higher Growth Potential: Small-cap companies are at an early stage of expansion. If their businesses grow successfully, their revenues and profits may increase at a faster rate than established large-cap companies. This growth can reflect in stock price appreciation over time. 

  1. Scope for Expansion in Smaller Markets: Small-cap companies often operate in smaller or limited markets. As these markets expand, such companies may gain a larger customer base and improve earnings. This creates room for business growth. 

  1. Flexibility in Business Strategy: Smaller companies can adapt more quickly to changes in technology, regulations, or consumer demand. They may modify products, pricing, or operations faster than larger organisations. 

  1. Portfolio Diversification: Small-cap mutual funds can add diversification to a portfolio that mainly includes large-cap or debt investments. Their performance may differ across market cycles, which can balance overall portfolio behaviour. 

Risks Involved in Small-Cap Mutual Funds

 Even the top small-cap mutual funds face the following risks: 

  • Higher Market Volatility: Small-cap stocks can react strongly to changes in economic conditions, sector performance, or investor sentiment. During market downturns, their prices may fall more sharply compared to large-cap stocks. 

  • Liquidity Risk: Trading volumes in small-cap stocks are generally lower. This may affect the fund’s ability to buy or sell large quantities of shares without impacting market prices. 

  • Business and Financial Risk: Small-cap companies may have limited operating history, narrower product lines, or lower access to capital. These factors can increase vulnerability during economic slowdowns. 

  • Longer Recovery Periods: After market corrections, small-cap stocks may take longer to recover compared to established large-cap companies. Fund performance can therefore vary significantly across market cycles. 

  • Suitability and Investment Horizon Considerations: Due to higher volatility, small-cap mutual funds are generally structured for investors with a longer investment horizon. Short-term movements in NAV may not reflect the underlying long-term growth trajectory. 

Taxability of Small-Cap Mutual Funds

Small-cap mutual funds are classified as equity-oriented funds under tax laws since they invest a minimum of 65% of their assets in Indian stocks. The tax rates for capital gains and dividend income are as follows: 

  1. Short-Term Capital Gains (STCG): If you sell small-cap mutual fund units within 12 months of purchase, the gains are treated as short-term. As a result, STCG is taxed at 20%, plus any relevant surcharges and cesses. 

  1. Long-Term Capital Gains (LTCG): If you sell units after 12 months, gains are treated as long-term. Hence, LTCG is taxed at 12.5% on gains exceeding ₹1.25 lakh in a financial year. 

The first ₹1.25 lakh of LTCG in a year is tax-exempt on equity mutual funds and listed shares combined. 

  1. Dividend Income Tax: Dividends from mutual funds are included in your income and taxed based on your income bracket. If the total dividend income from mutual funds exceeds the threshold in a financial year, a 10% TDS deduction is applied. 

  1. Special Notes: There is no separate capital gains tax for redemption of units if the total LTCG is below the ₹1.25 lakh exemption limit. Tax rates include surcharge and health & education cess as applicable. 

Small Cap Mutual Funds FAQs

It is hard to come up with an expected return of small cap mutual funds as even the best small cap mutual funds have very volatile returns over even 5 year periods or more.

Yes, capital gains from small cap funds attract taxes of 10-15% depending on the timeline of investment (i.e. short-term or long-term capital gains taxes) and the total amount of returns. Dividends are added to the taxable income and taxed as per the income tax slab.

You should not put your entire corpus of funds into risky assets like small cap mutual funds. However, the exact number would depend on the level of risk and the timeline at which you wish to invest.

Investing in small-cap funds via SIP can be considered if you have a long-term investment horizon. This is because they are highly volatile during market downturns, which makes them risky in the short term.

Small-cap funds are generally more volatile compared to large-cap or mid-cap funds. This volatility can affect the value of your withdrawals and the overall corpus. Therefore, it is important to have a sound risk management strategy.

Yes, investing in a small-cap fund can be considered by investors having a long-term time horizon of at least 5 to 10 years, as small-cap funds are highly volatile.

Investing in a small-cap fund can be considered if you want exposure to multiple small-cap stocks. On the other hand, investing in individual small-cap stocks can be a good option if you know how to study a company's financials, have a high-risk appetite, and have the time to track the market occasionally.

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