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Investing in mutual funds has become one of the most popular ways to grow wealth, especially for investors seeking higher returns. Among the different categories, small cap mutual funds have attracted a lot of attention in recent years due to their potential for higher growth. These funds focus on investing in smaller companies that have the potential to become future market leaders.
However, with higher return, higher risk also comes. If you’re wondering which small cap fund is best or searching for the best small cap mutual funds In this blog, we will understand the meaning of small-cap mutual funds, how they work, and explore a list of top performing small-cap mutual funds in India 2025.
What is Small Cap Mutual Funds?
Small-cap mutual fund invests in small companies that fall outside top 250 by market capitalization and are usually less known to most people in daily life. These are relatively smaller companies, with a market value of less than ₹5,000 crores.
By investing in top small cap funds in India, you get exposure to promising businesses that could deliver higher return in the long run. But at the same time, these funds come with higher market volatility compared to large-cap or blue-chip companies.
How Do Small Cap Funds Work?
Small-cap mutual funds are designed to invest in small companies that fall outside the top 250 listed companies in India based on market capitalization. As per SEBI guidelines, small-cap equity funds must invest at least 65% of its portfolio in small-cap companies and the remaining 35% can be allocated across large cap or mid cap stocks, debt instruments or cash equivalents.
As small cap funds focus on smaller companies, these funds can deliver higher returns compared to large-cap and mid-cap funds. However, with higher growth opportunities comes higher risk. The performance of small-cap companies can be impacted quickly due to changing market conditions, leading to greater volatility in these funds.
List of Best Small Cap Mutual Funds in India 2025
List of Best Small Cap Mutual Funds in India 2025 based on 5 years return.
| Fund Name | 1Y Return | 3Y Return | 5Y Return | Risk Level | Rating |
|---|---|---|---|---|---|
| Quant Small Cap Fund Direct Plan Growth | -5.73% | 26.24% | 37.23% | Very High | ★★★★ |
| Nippon India Small Cap Fund Direct Growth | -3.25% | 25.69% | 34.40% | Very High | ★★★★★ |
| Bandhan Small Cap Fund Direct Growth | 3.22% | 31.76% | 33.19% | Very High | ★★★★★ |
| Invesco India Smallcap Fund Direct Growth | 6.90% | 28.28% | 32.95% | Very High | ★★★★★ |
| Tata Small Cap Fund Direct Growth | -1.42% | 24.60% | 32.48% | Very High | ★★★★ |
| HSBC Small Cap Fund Direct Growth | -4.81% | 22.17% | 31.88% | Very High | ★★★ |
| HDFC Small Cap Fund Direct Growth | 3.20% | 25.71% | 31.84% | Very High | ★★★ |
| Edelweiss Small Cap Fund Direct Growth | 1.12% | 23.08% | 31.61% | Very High | ★★★★ |
| Bank of India Small Cap Fund Direct Growth | -3.64% | 22.73% | 31.19% | Very High | ★★★ |
| Franklin India Small Cap Fund Direct Growth | -6.46% | 25.07% | 31.11% | Very High | ★★★★ |
| Canara Robeco Small Cap Fund Direct Growth | -3.45% | 18.48% | 30.70% | Very High | ★★★ |
| ICICI Prudential Smallcap Fund Direct Plan Growth | 0.80% | 20.51% | 30.21% | Very High | ★★★ |
| Kotak Small Cap Fund Direct Growth | -3.09% | 18.20% | 30.02% | Very High | ★★ |
| Sundaram Small Cap Fund Direct Growth | 0.92% | 22.12% | 29.69% | Very High | ★★★ |
| LIC MF Small Cap Fund Direct Growth | -7.48% | 19.43% | 29.39% | Very High | ★★ |
| DSP Small Cap Direct Plan Growth | 0.45% | 22.09% | 28.88% | Very High | ★★ |
| Axis Small Cap Fund Direct Growth | 3.80% | 21.37% | 28.78% | Very High | ★★★ |
| Motilal Oswal Nifty Smallcap 250 Index Fund Direct Growth | -3.55% | 23.78% | 28.60% | Moderately High | ★ |
| Union Small Cap Fund Direct Growth | 0.33% | 19.70% | 27.93% | Very High | ★★ |
| ITI Small Cap Fund Direct Growth | 2.48% | 29.34% | 27.34% | Very High | ★★★ |
| SBI Small Cap Fund Direct Growth | -2.66% | 17.68% | 26.11% | Very High | ★★★ |
| Aditya Birla Sun Life Small Cap Fund Direct Growth | -2.64% | 19.74% | 25.38% | Very High | ★★★ |
| Aditya Birla Sun Life Nifty Smallcap 50 Index Fund | -1.98% | 25.94% | NA | Very High | ★★ |
| Axis Nifty Smallcap 50 Index Fund Direct Growth | -2.23% | 25.77% | NA | Very High | ★★ |
| ICICI Prudential Nifty Smallcap 250 Index Fund Direct Growth | -3.90% | 23.52% | NA | Very High | ★★ |
| Nippon India Nifty Smallcap 250 Index Fund Direct Growth | -4.25% | 23.31% | NA | Very High | ★★ |
| UTI Small Cap Fund Direct Growth | 2.12% | 21.30% | NA | Very High | ★★★ |
| PGIM India Small Cap Fund Direct Growth | 3.95% | 16.94% | NA | Very High | ★ |
High Returns
Small cap mutual funds invest in small rapidly growing companies aiming for higher returns than large or mid cap funds. While they can outperform other investments in the long run but these funds invest in smaller companies (about 65%) bringing additional risks. Top small cap mutual funds can provide over 30% returns in a years, but comes with bigger risk also.
High Volatility
Small-cap stocks can be highly volatile. During market uncertainty or volatility, these funds tend to be impacted the most. For example, even the best small-cap stocks were among the hardest hit during the COVID-19 market crash in March 2020, when the overall market declined sharply. Therefore, if you invest in small-cap mutual funds, be prepared for ups and downs.
Investment Horizon
Small-cap stocks are highly sensitive to market fluctuations and can be among the worst affected during market downturns. That’s why having a long-term investment horizon is crucial when investing in best small-cap funds. Giving your investment enough time to grow helps balance out short-term volatility and improves returns. Ideally, an investment period of 8 to 10 years is good, making these funds more suitable for long-term investors.
- Investing in small-cap companies today can deliver higher returns in the future if these companies grow and evolve into large-cap company., that's whay small cap mutual fund can deliver higher returns.
- Small-cap mutual funds are more volatile than large-cap mutual funds, any positive economic changes can have a greater impact on small cap funds compared to larger ones.
- Small-cap companies are more flexible and adapt quickly to change, giving them an edge over larger firms. This adaptability can translate into higher growth potential for investors in long run.
- Best small-cap mutual funds invest in companies with high growth potential. Skilled fund managers carefully research and select top-performing stocks, helping investors diversify while managing risks
- High Volatility: Small cap fund prices can be uncertain you might face bigger losses if they don't perform as anticipated.
- Risky Performance: Returns of small-cap funds depend on stock selection and fund manager decisions, which can sometimes result in lower than expected performance.
- Low Liquidity: These funds aren't popular among big or individual investors causing liquidity concerns. Buying or selling units can be challenging.
- Market Risk: Small cap companies with lower market shares lack strong networks making them risky during economic downturns affecting their connections with customers, partners and employees leading to temporary impacts on stock prices.
- Financial Risk: Small cap companies may struggle to secure loans during challenging times because they don't have valuable stocks for collateral and might not be seen as credible by financial institutions. This adds to challenge of getting funding when required.
Who Should Invest in Small Cap Mutual Funds?
Small-cap funds in India are good fit for:
- Diversification Seekers: Investors already in the market looking to diversify benefit from small cap funds. These funds though risky spread investments across various forms not just small caps.
- High Risk Takers: For those comfortable with higher risks small cap funds being riskier than mid or large-cap funds can be a suitable choice especially for investors willing to face potential downturns.
- Long Term Investors: Despite short term fluctuations small cap funds tend to perform well over the long term. Best small cap mutual funds may diliver above 25% return annually. They are ideal for investors willing to stay invested for long term investor who wants to invest for 5 year or 7 year.
Factors Consider Before Investing in Small Cap Mutual Funds
Considerations before investing in best small cap mutual funds in India:
- Risk Factor: Small cap funds are more volatile than large & mid cap and their net asset value can fluctuate dramatically. Due to high volatility these funds offer growth opportunities for investors comfortable with taking risks.
- Investor Expertise: Due to their high volatility small cap funds are suitable for investors with good mutual fund investment knowledge and expertise.
- Investment Term: These funds are best for long term investors and are not suitable for those with short investment horizon. High level of research required on best small cap companies before investing.
- Personal Goals & Risk Tolerance: Assess whether small cap funds align with your financial goals and risk tolerance. They carry a "high return/high risk" profile making them suitable for those comfortable with higher risks.
- Fund Management: Understand how the fund is managed and the allocation of assets by the fund manager. This insight can help evaluate the fund's potential performance.
- Expense Ratio: Every fund charges a fee for managing your investment known as the expense ratio. Keep an eye on this ratio because a higher expense ratio can mean lower returns. A lower expense ratio is better for your returns.
Taxation of Small Cap Mutual Funds 2025
- Dividend Taxation: Dividends received are added to taxable income and taxed based on the investor's income bracket. Additionally, there's a 10% TDS on dividends exceeding ₹10,000 in a financial year.
- Capital Gains Taxation:
- Long Term Investment (held for one year or more): If investor withdraws after one year a 12.5% tax applies on gains above ₹1.25 lakh per financial year. No taxes are due if gains are below ₹1.25 lakh.
- Short Term Investment (withdrawn before one year): If an investor withdraws funds before one year a 20% capital gains tax is imposed along with any applicable exit load.
Final Words
Investing in best small cap mutual funds in 2025 can offer investors higher returns by tapping into companies with strong growth prospects. However, small cap funds also come with higher risks due to market volatility. Therefore, these funds are best suited for long-term investors with a higher risk appetite who can stay invested through market ups and downs. By choosing top small cap mutual funds in India, diversifying your portfolio and maintaining a disciplined approach, you can take advantage of the growth opportunities that emerging companies may offer in the coming years.
FAQs on Best Mutual Funds in India
Q1. Are small cap funds a good choice for new investors?
Small cap funds can offer impressive returns and rapid growth but they are also highly volatile, especially compared to mid cap and large cap funds. Due to this volatility, they’re better suited for experienced investors who are comfortable with market fluctuations.
Q2. What kind of returns can I expect from small cap funds?
In the long term, small cap funds have the potential to deliver stable and rewarding returns. However, in the short term, they can be quite unpredictable due to market fluctuations which may impact results.
Q3. Is investing in small cap funds risky?
Yes, small cap funds come with a higher risk especially over the short term as they are more prone to major market swings. However, if held for the long term, they often balance out, offering the potential for substantial returns.
Q4. Are small cap funds suitable for short term investments?
Small cap funds are generally better suited for long term investments. They tend to perform best over an extended period, where their high growth potential can be realized.
Q5. Who should consider investing in small cap funds?
Small cap funds are usually best for investors who are knowledgeable and experienced with mutual fund investments. Their volatility can make them challenging for new or conservative investors.
Q6. How long should I stay invested in small cap mutual funds?
Since small cap funds primarily invest in stocks, a minimum investment period of at least 5 years is generally recommended to allow the investment to grow and balance out short term volatility.
Q7. Where do small cap mutual funds invest?
By regulation, small cap mutual funds must invest at least 65% of their holdings in stocks of companies ranked 251st and below in terms of market capitalization in India. Some funds also allocate a small portion to mid cap or even large cap stocks but the primary focus remains on small cap stocks, keeping the risk reward potential intact.
Q8. Should I invest in small cap mutual funds?
Small cap funds provide exposure to emerging companies, some of which may grow into mid sized or even large companies in the future. While they can be very volatile in the short term, staying invested over a longer period can yield market beating returns.
