Best Small Cap Mutual Funds
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 below 250 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 are those that work by investing your capital in the equity of companies that have a market capitalisation of under ₹5,000 crore. On the National Stock Exchange and the Bombay Stock Exchange, the two primary stock exchanges of India, small-cap funds are typically ranked at a position of under 250 regarding their market capitalisation. According to SEBI (Securities and Exchange Board of India), small-cap mutual funds are those that allocate at least 65% of investment into small-cap equity.
Even with a ranking that may arguably be in the lower range, such funds may yield high rewards. This is based on the assumption that small-cap companies have potentially immense growth prospects and may give you high returns in the future. Nonetheless, investors may possibly be aware of the fact that small-caps may also have the potential to be volatile and result in possible losses. Small-cap funds give you the potential of a 3 to 5-year annualised return, but this may not be sufficient to adequately gauge the value of small-caps.
Features of Small Cap Mutual Funds
As per the Securities and Exchange Board of India, a small cap fund must be investing equal to or more than 65% of their holdings into small cap companies. Such funds have the following features:
- Volatility and risk – Because the companies are small, their trajectories are affected by both large and small events. A medium-level increase in revenue or profit, whether from market expansion, deregulation or bagging contracts can trigger their share prices to grow by a disproportionately large percentage. Similarly, a small negative event can make their investors lose faith in the company quickly.
- High returns – Small cap mutual funds may face a higher risk of closure, but if they make it through tough times, they can generate returns comparatively higher than other categories of funds. The best small cap mutual funds can give over 30% in some individual years, although over time the returns flatten out.
Advantages of Small Cap Mutual Funds
- Small cap companies of today can become large cap companies of tomorrow, thereby giving multibagger returns to investors who buy their shares early on. Given a fixed or slow-changing market size, it is more likely that a million-dollar company will become a billion dollar company than a billion dollar company will become a trillion dollar one.
- Stock prices of small cap companies are more volatile. This may be because the same economic event may cause a much larger impact on a small cap company rather than a large cap company.
- Small cap companies tend to be much more open to and capable of pivoting their brand, strategy and business model. This can act as a significant advantage during changing economic and technological scenarios when compared to the large cap companies that are too comfortable in their market and branding to make any big changes.
- Small cap funds can act as a cutting edge for otherwise stable mutual fund portfolios made of index funds and debt funds.
Risks Involved in Small Cap Mutual Funds
Even the top small cap mutual funds face the following risks:
- Market risk – Small cap companies tend to have a lower market share (and are not considered to be too big to fail). They do not have strong networks of suppliers and distributors. Therefore, they are less likely to retain consumers, partners or employees during major economic downturns. This reduces the confidence among its stockholders to not undervalue their shares during negative events, thus making their stock prices vulnerable to temporary downturns.
- Financial risk – Small cap companies do not have an abundance of high value stocks to use as collateral in order to obtain loans, nor do they necessarily have large cash reserves. Moreover, small cap companies, being new, are less likely to have enough credibility or network with the financial institutions to obtain funding during such downturns.
Factors To Consider Before Investing in Small Cap Mutual Funds
Small-cap company stock may come from companies that are in the stages of growth and show solid fundamentals and performance prospects, but you must be aware of certain factors when you invest in small-cap mutual funds:
- Before you make any investment, you should conduct some due diligence to assist you in making informed decisions. It is essential to familiarise yourself with small-cap company specifics, such as products/services, history, management, fundamentals, and potential for development, before investing in a mutual fund that invests primarily in the equity of small-caps. You might also look at its present performance in its primary industry.
- Something worth considering before you invest in a small-cap mutual fund is to know whether the fund is suited to your unique personal aims and financial needs. You have to realise that small-cap mutual funds have the “high-return/high-risk” quotient so if you have a high-risk tolerance, you may consider such funds. Besides this, small-cap funds may be suited to those investors who wish to balance their portfolios with certain risky prospects in an otherwise stable portfolio of fixed-income or debt instruments.
- A small-cap fund’s Net Asset Value (NAV) is particularly susceptible to the changes of its underlying benchmark. As a result, when market circumstances are not favourable, many small-cap funds experience losses. However, it is also an excellent chance for investors who are ready to take a risk and want rapid growth.
- You may also consider how the fund is being managed and find out about how assets are being allocated by the specific fund manager of the mutual fund in question.
Who Should Invest in Small Cap Mutual Funds?
Small cap mutual funds are high-risk, high return investment avenues. The best small cap mutual funds may show massive returns of above 25% annually, but sometimes they may experience negative returns. This is because small cap companies tend to be comparatively more volatile than mid cap or large cap companies, especially during negative downturns in the market, whether in India or abroad.
Therefore, these funds are ideal investments for those who wish to invest with an aggressive risk-taking attitude in order to gain more over a shorter time period but may not have the time or expertise to handle all the investments themselves. They can be used by investors to act as a high-risk but high-return component in an otherwise balanced portfolio that may not be giving too high returns.
Taxability of Small Cap Mutual Funds
There are two aspects of income from a small cap fund – dividend and capital appreciation, both of which are taxed.
Dividend taxation – The dividends received are added to the taxable income and are taxed as per the income bracket of the investor. In addition to this, there is a 10% TDS on dividend amounts exceeding Rs. 5000 in a financial year.
Capital gains taxation – For capital gains taxation, it is important to know the timeline of the investment. A holding of one year or more is considered as a long term investment for equity funds.
If the investor withdraws the small cap mutual fund unit after one year from the date of investment, then a 10% tax on gains above Rs. 1 lakh per financial year must be paid. If the gains are below Rs. 1 lakh then no taxes need to be paid.
If the investor withdraws the funds before one year from the date of investment, then a capital gains tax of 15% is imposed in addition to any exit load.
How To Invest in Small-Cap Funds?
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.
Note: In case you do not have an account with Angel One, you can open a demat account with us in under a few minutes by submitting the necessary documents.
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:
- Search for the fund you want to invest in.
- Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in. You can also calculate the potential returns using the calculator.
- Evaluate the fund’s level of risk, its ratings and 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.
Top 5 Small Cap Mutual Funds
The following are some of the best small cap funds available in India –
| Name of the fund | Assets Under Management (Rs. in crore) | Minimum investment (Rs.) | 3-yr CAGR (%) | 5-yr CAGR (%) |
| Quant Small Cap Fund Direct Plan Growth | 3578 | 5000 | 64.73 | 24.09 |
| Axis Small Cap Fund Direct Plan Growth | 11,601 | 500 | 35.88 | 19.52 |
| Nippon India Small Cap Fund Direct Plan Growth |
24,490 | 5000 |
46.83 | 16.77 |
| Kotak Small Cap Fund Direct Growth | 8,672 | 500 | 42.95 | 16.61 |
| SBI Small Cap Fund Direct Plan Growth | 15,590 | 500 | 37.12 | 15.33 |
The above-mentioned top funds are for informational purposes only and are not recommendations. The funds are based on a 5-yr CAGR, which is subject to change frequently. Check out real-time data on Angel One.
Quant Small Cap Fund Direct Plan Growth
- The fund is fairly diversified, with the top 20 companies in terms of investment quantity taking up only about 62% of the capital (i.e. average of 3.1%). The top sectors include Consumer staples and the financial sector. This fund has an expense ratio of 0.62% and an exit load of 1% for redemption before 1 year.
Axis Small Cap Fund Direct Plan Growth
- This fund has an expense ratio of 0.54%. It has no lock-in period but it does have an exit load. It is a track record of over 9 years and currently has investments in Narayana Hrudalaya, CCL Products, Galaxy Surfactants etc. The fund does carry an exit load for redemption before 12 months of investment.
Nippon India Small Cap Fund Direct Growth
- This fund is a highly diversified one, with its top 20 companies as per investment quantity constituting only around 30% of the total investments. The sectors with the highest investments include capital goods sector, financial sector and chemicals sector. This fund has an expense ratio of 0.92% and an exit load of 1% for redemption before one month of investment.
Kotak Small Cap Fund Direct Growth
- This fund has its highest sector wise investment in the chemicals sector, even though the top company in terms of investment is in the metals and mining sector. The fund has an expense ratio of 0.59% and an exit load for redemption within one year since the date of allotment.
SBI Small Cap Fund Direct Plan Growth
- This fund only supports SIP, the minimum amount being Rs. 500. It has an expense ratio of 0.7% and an exit load of 1% for redemption before 1 year from the date of allotment. It is a fairly old fund that was launched in July 2009. Its top investments are in TREPS, Blue Star and Triveni Turbine etc.
Mutual Funds Calculators
Small Cap Mutual Funds FAQs
Are small cap funds high risk?
Yes, small cap funds are more risky than most other mutual funds like large cap funds, index funds or debt funds. This is because small cap companies have a very volatile trajectory in general.
Should I invest in small cap mutual funds?
You should definitely consider investing in the best small cap mutual funds as they can possibly give you returns that higher than mid cap or large cap funds.
What are the expected returns of small cap funds?
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.
What are the risks involved in small cap funds?
The top risks involved in investing in small cap mutual funds are market risk and financial risk.
Are small cap funds taxable?
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.
How much money should I invest in small cap funds?
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.
Are small-cap funds good for SIP?
Is it a good idea to start a SWP in a small-cap fund?
What are the benefits of investing in a small-cap fund?
Is it good to invest in a small cap fund for 3 to 5 years?
Is it better to invest in small cap mutual funds or stocks?
