What are small-cap mutual funds? Why should you invest in small-cap mutual funds?

Small capital mutual funds

Any discussion on various investment alternatives usually veers towards the best small-cap mutual funds that enable investors to generate excellent returns in the long term. So, let us see what small-cap mutual funds are and the factors that distinguish them from other investments.

Earn Upto 25% p.a. Interest On Your Savings With Money Club

What is a small-cap mutual fund?

Small-cap mutual funds invest their corpus in companies having a market capitalization of less than Rs 5K crores. So, these funds are a type of equity funds that invest in small companies. While market fluctuations are responsible for their performance, investors can expect good returns because the initial investment is in companies having excellent growth potential.
Here are some of India’s best small-cap mutual funds to invest in.

Name of the Fund


Risk Classification

1Y Returns


Fund Size (in Rs crores)

BOI AXA Small Cap Fund


Very High




Axis Small Cap Fund


Very High




Canara Robeco Small Cap Fund


Very High




Kotak Small Cap Fund


Very High




Edelweiss Small Cap Fund


Very High




(Source – https://groww.in/mutual-funds/category/best-small-cap-mutual-funds)

What are the features of small-cap mutual funds?

The primary features of small-cap mutual funds are as follows.

  • Asset Allocation – SEBI stipulates that small-cap mutual funds should allocate a minimum of 65% of their corpus to small-cap stocks.
  • Risk-Reward Ratio – The small-cap mutual funds are comparatively riskier than the large-cap and mid-cap funds over the short and medium-term. However, they can generate excellent returns in the long term.
Small Capital Mutual Funds

Points investors should note when investing in small-cap mutual funds.

The characteristics of small-cap mutual funds are that they are high-risk investments that can suffer massive losses in a bearish market because of their organizational and financial instability. However, they perform better than the mid and large-cap funds in a bullish trend by generating substantial returns. Therefore, we advise investors to consider the following aspects before investing in these funds.

Borrow Money In Times Of Need From Your Money Club

  • Determine your investment goal.
  • Every investor has their individual investment goals. For example, investor A might look for a 3-year investment plan, whereas investor B could have long-term plans of investing for ten years. So, there is no 'one-size-fits-all' solution in the investment market. The small-cap mutual fund scheme for investor A will be different from that of investor B. So, every investor should determine their investment goal in advance.

  • The specific funds’ past performance is critical.
  • Investors should invariably look at the fund’s past performance before investing. They should analyze the returns generated by the fund since its inception, considering the variables that have influenced its performance in the past. While the past record is crucial, the fund’s prospects don’t need to be similar. So, investors should take a balanced approach when investing in the best small-cap mutual funds.

  • The expense ratio helps determine the actual returns.
  • Investors should check out the various expenses that the fund could incur before investing in them. The expense ratio is an excellent indicator that allows investors to determine the precise returns the fund could generate on their investments. The Expense Ratio constitutes the yearly fee that AMCs levy on investors. It denotes the proportion of fund assets utilized for operational and administrative expenses. This ratio can differ from one scheme to the other. So, investors should consider the fund’s expense ratio before investing in the fund. This ratio enables the investors to determine the actual returns.

  • Look at the portfolio composition.
  • Investors should analyze the fund’s present holdings to get an idea of the portfolio composition. Though the position can vary in the future, it offers an insight into what value the fund can generate for the investor.

  • A Direct Plan is a better option.
  • The direct plans offered by the AMC do not involve intermediaries, unlike the regular plans. Hence, these plans have a lower expense ratio. In addition, it translates into a better return on the investment because the plan reports a higher NAV over regular schemes. So, if you are scouting for the best savings plans, it is advisable to opt for direct plans.

  • The fund manager’s experience has a crucial impact.
  • Fund managers buy and sell securities based on their research, analysis, and practical experience. As a result, their decisions can directly impact the fund's performance. So, the investor should look at the fund manager's qualifications and experience before investing in the corpus.

    Here are the benefits of investing in the best small-cap mutual funds.

  1. Excellent growth potential – Small-cap mutual funds have an inherent advantage over mid and large-cap funds because they possess an aggressive expansion strategy. Therefore, it translates into tremendous growth potential in the long term.
  2. Outperform other equity funds – Investing in mid and large-cap mutual funds need not consistently deliver the expected returns. Under such circumstances, the small-cap mutual funds can prove beneficial because they help balance your portfolio by offering better gains.
  3. Extensively researched investments – The best small-cap mutual funds generally research extensively and analyze the top-performing stocks before investing in companies having a massive potential to generate returns. As a result, these funds allow investors to diversify their portfolios by taking calculated risks.

How can investors invest in small-cap mutual funds?

Investors can invest in small-cap mutual funds in two ways.

  1. Systematic Investment Plan (SIP) – Investors can invest amounts as small as Rs 100 at fixed intervals, like monthly, quarterly, etc.
  2. Lumpsum Investment – This avenue allows the investor to invest in bulk amounts in a single installment.

Final Thoughts

Today, investors have various investment alternatives, like registered chit funds, post office savings, bank deposits, shares & stocks, etc. However, the small-cap mutual funds offer some of the best savings schemes for them by ensuring substantial returns in the long term. We have discussed the various benefits of investing in the best small-cap mutual funds that have the potential to outperform large and mid-cap funds. So, if you are looking for the best savings plans, small-cap mutual funds present an ideal opportunity.