Best Small Cap Mutual Funds

Benefits of Investing in Best Small Cap Mutual Funds

You can reap the following benefits by investing in the best small cap mutual funds outlined above:

1. Potential for Growth: As small-cap companies significantly focus on expansion strategies, they can potentially grow over a specific period to boost their returns on investment.
2. Outperforming Equity Funds: If large and mid-cap funds in your investment portfolio are underperforming, you can include small-cap funds for a balanced diversification with significant scope of outperformance.
3. Portfolio Diversification: Investing in small cap funds helps you diversify your portfolio with calculated risk. Fund managers undertake extensive research before investing in stocks, thereby ensuring efficient portfolio diversification.

Taxability on Small Cap Mutual Funds

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.

Important Factors to Consider for Small Cap Mutual Fund Investments

Here are the factors that you need to consider for small cap fund investments:

• Risk Factors: Small cap mutual funds are subject to high market volatility, besides having a significantly fluctuating net asset value (NAV).
• Investor Expertise: A lack of investor expertise can lead to increased risks due to the highly volatile nature of small cap mutual funds.
• Investment Horizon: Small cap mutual funds are well-suited for long-term investors. Given the market volatility, there will be high risks if you invest in these funds for the short term.

An Overview of Best Small Cap Mutual Funds in 2025

Here is the list of the top 5 small cap mutual funds you need to check out in 2025:

1. Nippon India Small Cap Fund

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.

• Asset Under Management: ₹57009.7 crore approximately
• Expense Ratio: 0.7%
• Investment Details: 94.93% (Equity), 5.07% (Others)

2. HDFC Small Cap Fund

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.

• Asset Under Management (AUM): ₹31230.11 crore approximately
• Expense Ratio: 0.77%
• Investment Details: 93.31% (Equity), 6.69% (Others)

3. SBI Small Cap Fund

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.

• Asset Under Management (AUM): ₹31227.19 crore approximately
• Expense Ratio: 0.7%
• Investment Details: 85.75% (Equity), 0.17% (Debt), 14.08% (Others)

4. Quant Small Cap Fund

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.

• Asset Under Management (AUM): ₹25183.45 crore approximately
• Expense Ratio: 0.68%
• Investment Details: 93.9% (Equity), 1.27% (Debt), 4.83% (Others)

5. Axis Small Cap Fund

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.

• Asset Under Management (AUM): ₹23139.08 crore approximately
• Expense Ratio: 0.56%
• Investment Details: 88.57% (Equity), 0.68% (Debt), 10.75% (Others)

Key Takeaways

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.

Frequently Asked Questions

1. What are the risks involved in small cap mutual fund investments?

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.

2. Where do small cap funds invest?

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.

3. Are small cap funds good for SIP?

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.

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