Written by CA Pankaj Chhabra – 
& Megha Jain –
Small cap funds offer a unique investment opportunity for those looking to capitalize on growth of small and emerging companies.
These funds primarily focus on investing in small cap companies, defined as those ranking above 250 in terms of market capitalization. As compared to larger, more established companies, small companies have more room for growth and can be a thrilling addition to your portfolio.
However, it is important to keep in mind that these investments come with a higher level of risk. But if you are up for the volatile swings in the market, small cap funds might just be perfect for you!
What Is a Small Cap Fund?
Small cap funds are a class of equity mutual funds that invest their corpus in companies that rank above 250 in market capitalization.
These small-sized companies are considered to have higher growth potential and the ability to grow into larger companies in future.
The stocks of these companies can possibly double or triple up over an exceptionally brief period of time.
However, small cap funds are relatively riskier and volatile in short to medium term as they are highly influenced by market movements, economic downturns and other factors.
Top 10 Small Cap Mutual Funds
Here are a few Best Small Cap Mutual Funds to consider:
| Ranking | Mutual Funds | 5 year Returns | 3 year Returns |
| 1 | Nippon India Small Cap Fund – Growth Plan – G | 13.60% | 30.55% |
| 2 | ICICI Prudential Small Cap Fund – G | 11.99% | 25.63% |
| 3 | SBI Small Cap Fund- Regular Plan – G | 11.87% | 25.97% |
| 4 | HDFC Small Cap Fund – Regular -G | 10.86% | 24.80% |
| 5 | Kotak Small Cap Fund – G | 13.83% | 27.36% |
| 6 | Quant Small Cap Fund- Direct Plan- Growth | 24.68% | 52.99% |
| 7 | Union Small Cap Fund- Direct Plan- Growth | 11.26% | 24.60% |
| 8 | HSBC Small Cap Fund- Direct Plan- Growth | 10.94% | 25.99% |
| 9 | IDBI Small Cap Fund- Direct Plan- Growth | 11.13% | 24.58% |
| 10 | DSP Small Cap Fund -Direct Plan- Growth | 10.19% | 26.05% |
Who Should Invest In Small Cap Funds?
- Investors with Long-Term investment horizon.
It is very important to have a long-term investment horizon when investing in small cap funds, as these companies may take longer to realize their full potential.
Short-term investors may want to avoid these funds as they are more prone to volatility and can be affected by market fluctuations.
- Investors seeking Higher Capital appreciation.
Investing in small cap funds can provide investors with the opportunity to achieve higher returns. These companies have higher potential to grow into larger companies, but also come with a higher level of risk.
- Investors with high Risk Tolerance.
Small cap funds can provide substantial returns over time and even outperform other equity-oriented funds over the long-term. But even the best small cap mutual funds pose a significant amount of risk during a bearish trend.
Therefore, small cap funds are suitable for investors willing to accept higher volatility in exchange for the potential for higher returns in a long-term horizon.
As with any investment, it’s important to do your research and consult a financial advisor before investing.
How To Start Investing In Small Cap Funds Online?
- STEP 1- Download the SPA Capital App (Available on Android & Apple Store)
- STEP 2- Create your profile
- STEP 3- Select any Small Cap fund from the list of Funds
- STEP 4- Choose between SIP or Lump sum mode
- STEP 5- Complete the payment process
Factors To Be Considered While Investing In Small Cap Funds
Investors must make sure to take the following things into account before investing in small cap mutual funds:
- Fund’s Performance History
It is important to look at the returns generated by the fund to get an idea of how it has performed over time.
It can help investors to understand fund’s volatility and consistency and to compare how it has performed in comparison to other funds available in the market.
- Fund’s Management Team
It is very important to research about the fund manager’s expertise and experience to ensure better returns, as they will be responsible for deciding on when and where to make the investment.
- Expense Ratio
Small cap funds may have higher expense ratios and management fees compared to other funds because of the active management they require.
This can eat up your returns thus, it is important to do your research and chose a fund with a good track record and low expenses
- Fund’s investment objective and strategy
Investor must ensure that the fund’s investment objective and strategy align with the investment goal depending on the investment horizon, expected returns and associated risks.
Investors seeking higher capital appreciation with an appetite for high risk should ideally invest in small-cap but if you are looking for stable, consistent returns, these might not be the funds for you!
- Risk Tolerance
Small cap funds are riskier than large or mid cap funds, therefore one must consider the risk they are willing to take before investing in these funds.
Read about: Taxability Of Returns From Small Cap Funds
Advantages Of Investing In Small Cap Funds
- Higher Return Potential. Small cap companies often have higher growth potential compared to larger companies. They are closely related to domestic economy and can benefit more from growth in the domestic market. This can lead to higher returns for investors.
- These funds invest in all companies except the top 250 companies in terms of market capitalization. Therefore, can diversify your portfolio by investing in various different sectors and industries.
- Risk Management. Small cap companies spread the risk across various small companies, rather than having a concentrated exposure to one large company.
Frequently Asked Questions
- What are small cap funds?
Funds that primarily invest in companies ranking above 250 in terms of market capitalization.
- Is it worth investing in small cap funds?
Small cap funds offer great potential for growth if you are willing to take high risks. They tend to outperform large and mid-cap funds in long term.
- Are small cap funds risky?
Small cap funds are highly risky investments and should be considered only if you can bear the volatility of the market.
- What are the advantages of small-cap funds?
Small cap funds offer substantially high returns compared to large and mid-cap funds and help diversify your portfolio.
- What is the difference between small cap and mid cap funds?
Mid cap funds invest in companies ranking between 101-250 in market capitalization whereas small cap funds invest in companies ranking above 250 in market capitalization.
Mid cap funds are safer than small cap funds but have lower growth potential when compared to small cap funds.
- Who should invest in small cap funds?
Small cap funds are suitable for investors willing to accept higher volatility in exchange for the potential for higher returns.
