Small Cap Mutual Funds

Small cap funds, as open-ended equity schemes, invest at least 65% of their assets in equity shares of companies with small market capitalizations, typically below ₹5,000 cr.

time horizon

Long Horizon

total funds

32 Funds

total aum

₹2,50,357 Cr Total AUM

Equity

Explore Small Cap Mutual Funds

Fund nameFund sizeExpense Ratio
3Y Returns
Quant Small Cap Fund
Quant Small Cap Fund

Small-Cap Very High Risk

₹15,663 Cr0.77%47.0%
Nippon India Small Cap Fund
Nippon India Small Cap Fund

Small-Cap Very High Risk

₹45,894 Cr0.73%37.6%
Sundaram Long Term Micro Cap Tax Advantage Fund Series VI₹41 Cr1.16%37.4%
HSBC Small Cap Fund
HSBC Small Cap Fund

Small-Cap Very High Risk

₹13,980 Cr0.68%37.1%
Sundaram Emerging Small Cap - Series V₹83 Cr0.79%35.8%
Sundaram Emerging Small Cap - Series VI₹45 Cr0.77%35.5%
Tata Small Cap Fund
Tata Small Cap Fund

Small-Cap Very High Risk

₹6,125 Cr0.31%35.1%
HDFC Small Cap Fund
HDFC Small Cap Fund

Small-Cap Very High Risk

₹28,606 Cr0.61%33.9%
Franklin India Smaller Companies Fund₹11,833 Cr0.93%33.2%
Canara Robeco Small Cap Fund
Canara Robeco Small Cap Fund

Small-Cap Very High Risk

₹9,586 Cr0.48%33.2%

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All about Small Cap Mutual Funds

What are Small Cap Mutual Funds?

As per the SEBI’s classification, small-cap mutual funds are equity funds that invest at least 65% of their total assets in small-cap stocks.

Small-cap stocks belong to companies that rank from 251st onwards on the stock exchange by market capitalisation. Historically, small caps have outperformed large-caps during market recoveries/bull runs.

As per a report by Goldman Sachs, 70% of all multi baggers in India since 2000 have belonged to the small cap universe.

Advantages of Small Cap Funds

High growth potential

Small-cap funds primarily allocate their investments to small and growing businesses. Thus, they inherently have a significant potential for delivering robust returns. Small-cap funds invest in companies that are in their early stages of growth. It is quite possible for these companies to generate high earnings and profitability. As a result, the stock returns tend to be high.

The average category return of small-cap mutual funds has outperformed both large-cap and mid-cap funds in various time periods. For example, in the last 10 years, the category average annualized return of smallcap was 21.73%, compared to 13.31% for large-cap funds and 19.94% for mid-cap funds.

Category/ Average Return3Y5Y10Y
Large Cap17.96%13.87%13.31%
Mid Cap27.26%19.49%19.94%
Small Cap34.26%22.65%21.73%

Source: AdvisorKhoj

Diversified Portfolio

Small-cap mutual funds give exposure to more diversified and unique sectors (21 sectors) than large-cap funds.

Disadvantages of Small Cap Funds

High volatility

Small-cap funds have the highest volatility among all mutual funds. Volatility is the rate at which the stock prices increase or decrease over a particular period. In volatile market scenarios, small caps stocks tend to fluctuate more than large caps and mid-cap funds.

The table below shows the standard deviation of the benchmarks. Standard deviation measures the volatility of mutual fund returns. It's quite clear that small-cap funds have the highest volatility. 

Standard Deviation (SD)1Y5Y
Nifty 10010.30%18.94%
Nifty Midcap 10012.49%20.50%
Nifty Smallcap 10014.14%21.80%

Note: The SD values are as of 29th September 2023 and are annualised.

Liquidity

Liquidating small-cap fund holdings can be the biggest concern for AMCs when the markets are highly volatile. These stocks have a small capital base, and their trade volumes are also lower. Thus, making it difficult for the fund to exit some investments. However, investors' redemptions are always honoured by the fund house. 

Requires long term investment commitment

In general, equity investments are highly volatile. A long-term investment tenure will help average out the impact of volatility. And, of all, small-cap funds have the highest risk. Therefore, a long-term investment tenure is a must. 

Let's look at the rolling returns for the Nifty 100, Nifty Midcap 100, and Nifty Smallcap 250.

Index1Y2Y3Y5Y7Y10Y
Nifty 10017.80%9.57%1.55%0.11%0%0%
Nifty Midcap 10029.98%21.96%13.36%0.78%0%0%
Nifty Smallcap 25039.85%30.41%20.50%3.59%0%0%

Source: Advisorkhoj

The table above captures the probability of each index giving negative returns over the specified durations. Taking a closer look, the Nifty Smallcap 250 index has the highest probability of generating negative returns in the short term. However, a declining trend is evident over the years. Thus, proving a long-term investment commitment will help generate high returns.

Should you invest in Small Cap Funds?

Before you invest in small-cap funds, you should consider your risk appetite and how well your portfolio is diversified. A financial advisor can help you make a decision based on your situation and existing portfolio.

Investors seeking high-risk investments can consider small-cap mutual funds. Since small-cap funds are high-risk, they have a high return potential. However, these high returns come at a cost - high volatility and drawdowns during market crashes. Thus, small-cap mutual funds are not everyone, and investors must be mindful of the associated risks. 

Note: The above information is for educational purposes only. It is best to consult a financial advisor before making investment decisions.

Still got questions?
We're here to help.

No, small-cap funds are not risk-free. In fact, they have the highest risk among all equity funds. Small-cap funds invest in small companies that are not very popular. Due to low trading volumes, these funds suffer from liquidity issues.
The longer the better. Small caps tend to perform well over time but can be very volatile in the short term.
The tax rate on capital gains from small-cap mutual funds depends on how long you hold the investment. If you sell them within a year, you have to pay a 15% tax on the capital gains. If you sell them after a year, you have to pay a 10% tax on capital gains that exceed Rs 1 lakh.
Depending on your comfort towards high-risk investment, you can consider investing in small-cap mutual funds. Having said that, you need to have a long-term investment horizon and a disciplined investment approach to overcome the impact of market volatility.
Small-cap funds have no lock-in period. However, withdrawals within one year attract exit load.