Small Cap Mutual Funds

According to SEBI guidelines, Small Cap Mutual Funds need to put at least 65% of their money into small companies. Among the thousands of listed companies, small caps are usually ranked beyond 250 and have a market value between 1000 to 15000 crore.

These companies provide investors with higher returns over a long time, but they also come with more risks and can be unpredictable, so the fund manager tries to control risk by diversifying the portfolio between 50-70 stocks. Also remaining 35% of money is allocated as per market conditions in tough situation it keeps in large or mid cap stocks and shifts more money into Small Cap Stocks when see the good opportunities in market.

Investing in small-cap funds has its own advantages compared to other types of Mutual Funds. Here are some of the benefits:

• Early Investment Opportunities in Emerging Companies

  Small cap funds provide investors with the chance to invest early in emerging companies that are ready for development. These small companies are often under-researched and undervalued but have a high potential to become industry leaders, fund managers & their teams identify these companies at a very early stage.

• High Growth Potential

  Smaller companies with the right business model and strong management team often grow faster than larger ones, which means they are offering the chance for substantial returns in the long run. When these companies perform well in business, their stock prices can rise quickly.

• Highest Returns Equity Funds

  These Funds offer some higher returns within their Equity category. Even though they can be riskier because they invest in smaller companies, but these Equity Stocks have the potential to generate higher returns sometimes more than Large and Mid Cap Funds.

• Access to 50+ Best Companies in Single Portfolio

  Firstly, it offers diversification, spreading the risk across different companies and reducing the impact of any single company's poor performance. These funds carefully select high-potential companies for investment, managed by experienced professionals.

Here are the top 5 small cap mutual funds to begin your systematic investment plan with:

1. Bandhan Small Cap Fund

After being launched on February 1st, 2020, this Bandhan Small Cap Fund has made long strides by delivering 43.30% returns in just one year. Although being a newcomer in the small cap mutual funds category, it manages a robust AUM (Asset Under Management) at Rs.9,691 Cr as of 31.12.2024. It is a good investment option for 2-3 years, starting your SIP with just Rs.1000 on today's date.

2. Invesco India Small Cap Fund

The Invesco India Small Cap Fund has given an impressive return of 29.73% in a 5-year time frame, supposedly beating its benchmark at 20.62%. Investing in this fund will be a smart decision if driving benefits from the fast-growing business is what you need in your portfolio.

3. Tata Small Cap Fund

Starting the year with a high reward-giving small cap fund, the Tata Small Cap Fund has delivered 33.74% returns in the last 3 years. Apart from the Tata Mutual Fund legacy, it manages a strong AUM of 9,699 Cr as of 31.012.24. It is a good investment choice if you are willing to invest a premium amount for a higher return.

4. Quant Small Cap Fund

The Quant Small Cap Fund has done well in recent years, with a strong return of 42.6% over the last 3 years. It’s managed by Quant Mutual Fund and currently has an AUM of Rs.2,000 Crores. The fund keeps its major investment in smaller companies that have the potential to grow, making it a good choice for investors who are okay with taking some risk for the chance of higher returns in the future.

5. Mahindra Manulife Small Cap Fund

The Mahindra Manulife Small Cap Fund has also performed well, with a return of about 35% over the last 3 years. This fund, managed by Mahindra Manulife Investment Managers, has an AUM of Rs.1,500 Crores. It invests in smalle-sized that is expected to grow, which could provide good returns for investors who are willing to take on a bit more risk for the potential of higher profits down the road.

Pro Tip: Fast track your investments using SIP Calculator and get your estimated returns in minutes. 

Here's an easy way to start your investment with mysiponline:

Step 1: Verify your KYC Details

Step 2: Fill out Personal & Banking Information

Step 3: Choose your preferred Preferred small cap funds scheme or seek assistance from our expert advisors

Step 4: Decide whether to invest through SIP or Lump-sum

Step 5: Place funds in the cart and complete online payment via UPI or Net Banking

Step 6: Track Investment regularly on our Dashboard with detail analytical reports

The following points will help investors to identify if this scheme is the right match for them:

• Investors with Long Term Investing Goals

  Small Cap Funds are ideal for investors with long-term goals. These funds focus on small companies with strong growth potential, making them suitable for patient investors who are ready to keep their assets for five years or more to maximize growth chances.

• Investors Having High Risk & High Returns Investing Style

  These funds are a good match for investors who are okay with taking high risks in exchange for the possibility of making high returns. These investors don't mind when prices go up and down a lot because they believe they can make big profits in the long run.

• Growth Focused Investor

  These funds invest in small companies that are in their initial stage but have the potential to grow a lot while making them attractive to investors who are seeking for capital appreciation.

Before investing in the Small Cap Mutual Funds, it is important to understand the risks that are involved:  

• High Volatility

  As small cap funds largely invest their portfolio in small cap stocks that have very low traded volume. So on any changing factors like market sentiments, company performance, economic condition creates high buying volume or high selling volume that fluctuate stock prices very rapidly. That is why small cap stocks have higher volatility than large cap-stocks. Hence funds NAV price always shows same kind of volatility.

• Higher Drawdown or Fall

  During every market crash or correction small cap stocks tend to fall very sharply. So investing can cause more significant declines compared to larger companies. Investors should be prepared for potential losses during these periods.

• Liquidity Risk

  Investing in Small Cap Funds carries liquidity risk, where buying or selling shares can impact the fund's price due to lower trading volumes and fewer market participants. This can result in bigger differences between buying and selling prices and make it harder to buy or sell shares, especially when the market is unpredictable.