Small cap mutual funds have become increasingly popular among Indian investors looking for growth opportunities in their investment portfolio. These funds invest primarily in companies with smaller market capitalizations, offering potential for higher returns compared to large-cap funds, albeit with increased volatility. In this article, we’ll explore the top 5 small cap mutual funds in India based on their performance and key features as of March 2025.
What Are Small Cap Mutual Funds?
Small cap mutual funds are equity funds that invest at least 65% of their portfolio in companies that are ranked beyond 250 in terms of market capitalization on stock exchanges. These companies typically have a market capitalization of less than Rs. 5,000 crores. The Securities and Exchange Board of India (SEBI) categorizes these funds based on their market capitalization.
Small cap companies are often not as well-known as their larger counterparts, but they can offer significant growth potential. They are generally in the early stages of their business lifecycle, which means they have room to expand and potentially deliver higher returns over the long term.
Understanding the Small Cap Fund
As of March 2025, the Indian mutual fund landscape continues to evolve, shaped by economic developments, policy changes, and global market movements. Small cap funds have experienced significant volatility in recent months, with many funds seeing a correction of more than 14% since the beginning of 2025.
Despite this recent downturn, investor interest in small cap funds remains robust. According to data from the Association of Mutual Funds in India (AMFI), inflows into small cap funds rose by 22.6% month-over-month in January 2025, totaling Rs. 5,720.87 crore compared to Rs. 4,667.70 crore in December 2024.
It’s worth noting that in early 2024, SEBI expressed concerns about the rapid inflow of investments into small cap funds and issued directives to mutual funds to limit large, one-time investments in these funds. This regulatory move aimed to mitigate risks associated with the rapid inflow of investments and protect investor interests.
Top 5 Small Cap Mutual Funds in India (March 2025)
1. Quant Small Cap Fund
Quant Small Cap Fund stands out as one of the top-performing small cap funds in India with an impressive 5-year CAGR of 41.39% as of March 2025. The fund has an Assets Under Management (AUM) of Rs. 25,183.45 crores and an expense ratio of 0.68%.
Key Features:
- 5-Year CAGR: 41.39%
- AUM: Rs. 25,183.45 crores
- Expense Ratio: 0.68%
- Fund Category: Small Cap Fund
This fund has consistently outperformed many of its peers in the small cap category. At this rate of return, a lump sum investment of Rs. 1 lakh made 5 years ago would have grown to approximately Rs. 5.7 lakhs.
2. Bandhan Small Cap Fund
Bandhan Small Cap Fund (formerly IDFC Small Cap Fund) has delivered strong performance with a 5-year CAGR of 33.09%. The fund has an AUM of Rs. 9,236.21 crores and an expense ratio of 0.45%.
Key Features:
- 5-Year CAGR: 33.09%
- AUM: Rs. 9,236.21 crores
- Expense Ratio: 0.45%
- Minimum SIP Investment: Rs. 100
- Minimum Lump Sum Investment: Rs. 1,000
Bandhan Small Cap Fund comes under the equity category of IDFC Mutual Funds. The fund has given annualized returns of 26.17% in the past three years.
3. Nippon India Small Cap Fund
Nippon India Small Cap Fund has been a consistent performer with a 5-year CAGR of 30.67%. It has one of the largest AUMs in the small cap category at Rs. 57,009.70 crores and an expense ratio of 0.7%.
Key Features:
- 5-Year CAGR: 30.67%
- AUM: Rs. 57,009.70 crores
- Expense Ratio: 0.7%
- Minimum SIP Investment: Rs. 100
- Minimum Lump Sum Investment: Rs. 5,000
Nippon India Small Cap Fund has given annualized returns of 22.32% in the past three years. It’s worth noting that due to its large size, the fund has taken measures to limit inflows to safeguard investor interests.
4. Invesco India Small Cap Fund
Invesco India Small Cap Fund has delivered a 5-year CAGR of approximately 25.67% as of February 2025. The fund has an AUM of Rs. 5,904 crores and an expense ratio of 0.41%.
Key Features:
- 5-Year CAGR: 25.67%
- AUM: Rs. 5,904 crores
- Expense Ratio: 0.41%
- Minimum SIP Investment: Rs. 500
- Minimum Lump Sum Investment: Rs. 1,000
- Fund Manager: Aditya Khemani, Taher Badshah
Invesco India Small Cap Fund was started on October 30, 2018, and has given a CAGR return of 23.62% since inception. The fund has allocated its investments primarily in sectors like Industrial, Financial Services, Health, Consumer Cyclical, and Technology.
5. DSP Small Cap Fund
DSP Small Cap Fund has delivered a 5-year CAGR of 24.53% as of February 2025. The fund has an AUM of Rs. 14,996 crores and an expense ratio of 0.8%.
Key Features:
- 5-Year CAGR: 24.53%
- AUM: Rs. 14,996 crores
- Expense Ratio: 0.8%
- Minimum SIP Investment: Rs. 100
- Minimum Lump Sum Investment: Rs. 100
- Fund Manager: Vinit Sambre, Resham Jain
DSP Small Cap Fund was started on January 1, 2013, and has given a CAGR return of 20.74% since inception. The fund has allocated its investments primarily in sectors like Consumer Cyclical, Basic Materials, Industrial, Health, and Consumer Defensive.
Investment in Small Cap Mutual Funds
Understanding the characteristics of small cap mutual funds can help investors make informed decisions:
- Higher Growth Potential: Small cap companies are often in the early stages of their growth cycle, which can translate to higher returns over the long term.
- Higher Volatility: Small cap funds are more susceptible to market fluctuations and economic downturns, leading to higher volatility compared to large-cap funds.
- Long-Term Investment Horizon: Due to their volatile nature, small cap funds are generally more suitable for investors with a long-term investment horizon, typically 5-7 years or more.
- Diversification Benefits: Small cap funds can provide diversification to a portfolio that already includes large-cap and mid-cap funds, as they often perform differently under various market conditions.
- Research-Intensive: Small cap companies are less researched and followed by analysts compared to large-cap companies, which means fund managers need to conduct thorough research to identify promising investments.
Tax on Small Cap Mutual Funds
As of March 2025, the taxation of small cap mutual funds in India is as follows:
- Short-Term Capital Gains (STCG): If units are sold within one year of purchase, gains are taxed at 20%.
- Long-Term Capital Gains (LTCG): If units are sold after one year of purchase, gains are taxed at 12.5% without indexation benefit. Long-term gains up to Rs. 1.25 lakh per financial year are exempt from capital gains tax.
- Dividend Income: Dividends received from mutual funds are taxable at the investor’s income tax slab rate.
It’s important to note that tax laws are subject to change, and investors should consult with a tax advisor for the most current information.
Factors to Consider for Small Cap Funds
When evaluating small cap mutual funds, consider the following factors:
- Fund Performance: Look at the fund’s performance over different time periods (1-year, 3-year, 5-year) and compare it with its benchmark and category average.
- Fund Manager’s Experience: The experience and track record of the fund manager are crucial, especially for small cap funds where research and stock selection play a significant role.
- Fund Size: Very large small cap funds may face challenges in deploying funds efficiently, as the small cap universe is limited.
- Expense Ratio: The expense ratio directly impacts your returns. Lower expense ratios are generally preferable, all else being equal.
- Portfolio : Check if the fund is overly concentrated in certain sectors or stocks, which could increase risk.
- Risk Metrics: Consider risk metrics like standard deviation, beta, and Sharpe ratio to understand the fund’s risk profile.
Growth of Small Cap Funds
Future of small cap funds in India looks promising, despite the recent market correction. India’s economy is expected to continue growing, which should benefit small cap companies that are often more closely tied to domestic economic growth.
However, investors should be prepared for periods of volatility and potential regulatory changes. SEBI’s recent directives indicate a focus on protecting investor interests and ensuring the sustainable growth of the mutual fund industry.
Frequently Asked Questions (FAQs)
- What is the minimum investment amount required for small cap mutual funds?
The minimum investment amount varies across different small cap funds. For lump sum investments, it typically ranges from Rs. 100 to Rs. 5,000. For SIP investments, the minimum amount usually ranges from Rs. 100 to Rs. 1,000 per month.
- Are small cap mutual funds suitable for beginners?
Small cap mutual funds are generally considered high-risk investments due to their volatility. They may not be ideal for beginners or risk-averse investors. Beginners might want to start with more stable investment options like large-cap funds or balanced funds before venturing into small cap funds.
- How long should I stay invested in small cap mutual funds?
Due to their volatile nature, small cap funds are generally more suitable for long-term investment horizons, typically 5-7 years or more. This longer timeframe allows the investments to potentially ride out short-term market fluctuations and benefit from the growth potential of small cap companies.
- What is the difference between small cap, mid-cap, and large-cap mutual funds?
The main difference lies in the market capitalization of the companies they invest in. As per SEBI’s categorization, large-cap funds invest in the top 100 companies by market cap, mid-cap funds invest in companies ranked 101-250, and small cap funds invest in companies ranked beyond 250.
- How often should I review my small cap mutual fund investments?
While it’s good to stay informed about your investments, frequent monitoring can lead to emotional decision-making based on short-term market movements. A quarterly or semi-annual review is generally sufficient for long-term investments like small cap mutual funds. However, significant life events or major market changes might warrant a more immediate review.
