As per SEBI's October 2017 guidelines, equity schemes are classified into large, mid and small cap stocks. Small cap stocks include companies ranked 251st and beyond on the stock exchange. The mutual fund schemes that allocate at least 65% of their total assets to these companies' equity and related securities are known as small cap mutual funds.
These funds are a great addition to the portfolios of individuals looking to diversify, take calculated risks and focus on long-term financial growth. So here goes a snapshot of some of the best small cap mutual funds to help you make informed decisions in 2025.
You can reap the following benefits by investing in the best small cap mutual funds outlined above:
Capital gains tax applies on the sale of small cap mutual funds. If you sell it before 1 year from the purchase date, a 20% short-term capital gain tax (STCG) applies without any cess or surcharge. In case you sell it after 1 year, long-term capital gain tax (LTCG) applies at the rate of 12.5% on capital gains above ₹1.25 lakh.
Here are the factors that you need to consider for small cap fund investments:
Here is the list of the top 5 small cap mutual funds you need to check out in 2025:
Launched in September 2010, Nippon India Small Cap Fund requires a minimum investment of ₹5,000 for first-time one-time investors while the minimum SIP (Systematic Investment Plan) amount is ₹100. As this is an open-ended fund, you can invest in it based on your will and measure stock performance with its benchmark Nifty Smallcap 250 TRI.
Managed by Dhruv Muchhal and Chirag Setalvad, the HDFC Small Cap Fund was launched in 2008. The minimum amount of investment in this fund is ₹100 for both SIP and lump sum. However, the fund imposes a 1.0% exit load on the sell value if redeemed within 365 days.
Since its inception, R. Srinivasan has been the lead fund manager for SBI Small Cap Fund, overseeing its performance. The minimum amount of investment in this fund via lump sum is ₹5,000 and ₹500 for SIP. With a benchmark as BSE 250 Small Cap TRI, this fund has the potential to provide promising returns to investors with a horizon of 3-4 years.
Launched in 2013, Quant Small Cap Fund has fund managers Sandeep Tandon, Ankit Pande, Varun Pattani, Ayusha Kumbhat and Sanjeev Sharma, following an active investment strategy to identify high-growth potential stocks. With NIFTY Small Cap 250 TRI as its benchmark index, this fund is suitable for investors seeking aggressive growth opportunities with a long-term horizon.
Axis Small Cap fund was launched in November 2013 with Tejas Sheth, Mayank Hyanki and Krishnaa N as the fund managers. With a benchmark as Nifty Small Cap 250 TRI, it is an open-ended fund requiring a minimum investment amount of ₹500 for lump sum and ₹100 for SIP.
Investing in some of the best small cap mutual funds facilitates portfolio diversification, balancing the risk-reward ratio. Recent news highlights that among the top five mutual funds with the highest returns over the past 5 years, three belong to the small-cap category. While these funds offer promising returns, it is essential to evaluate factors like risk, investment duration and market volatility before investing.
Small cap mutual funds involve high volatility risks, in addition to performance risks due to concerns about stock selection, stock performance, investment horizon of the fund manager and other reasons. This makes them highly risky options, as significant losses can occur if the stock price fails to move as anticipated.
Small cap funds in India have to invest at least 65% in stocks of companies with a rank of 251 or beyond. It might include mid-cap and large cap stocks to a certain extent in its allocation to balance the risk-reward proportion.
Investing in small cap funds through SIP can be beneficial for a long-term horizon. In the short-term, small cap funds are associated with high volatility, increasing the risks for investors. Thus, to answer ‘is small cap mutual fund safe’, it is essential to mention that investments are subject to market volatility.