Best Small Cap Mutual Funds 2025

Small-cap funds invest in smaller, fast growing companies, so they offer higher return potential but come with higher volatility. Mid-cap funds invest in medium sized companies that balance growth and stability, giving moderate risk and returns. Large-cap funds invest in big, established companies that are more stable and less risky.

In simple terms, small-caps are high growth and high risk, mid-caps are balanced, and large-caps are stable with lower risk.

Minimum investment amounts vary by fund and platform:

• SIP (Systematic Investment Plan): Typically starts at ₹500/month. Digital platforms often offer Micro-SIPs starting at ₹100-₹250/month.
• Lump sum (One-Time): Most funds require a minimum initial investment of ₹5,000.

Small cap mutual funds mainly invest in very small and fast growing companies. These companies have less stable earnings, their stock prices move sharply and they are harder to buy or sell in large quantities. Because the fund’s performance depends on these volatile stocks, the overall fund becomes more risky. 

This is why small cap funds can give high returns, but they can also fall quickly during market downturns.

Small-cap funds are best suited for investors who match the following profile:

• High Risk Appetite: You are comfortable with significant market volatility in exchange for potentially higher returns.
• Long-Term Horizon: You are investing for distant goals (like retirement or education) and can keep money invested for 5-7+ years.
• Growth-Oriented: You want to invest in emerging, innovative companies that have the potential to become future market leaders.

Yes, Non-Resident Indians (NRIs) can invest in Indian small-cap mutual funds.

• Investment Method: You must use an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) bank account.
• Repatriation: Funds invested via an NRE account are 100% repatriable (you can transfer the principal and gains abroad). NRO repatriation is generally restricted.

Tax: NRIs pay LTCG tax at 10.4% and should maintain a Tax Residency Certificate (TRC) to claim DTAA benefits and reduce TDS.

Small-cap funds often give higher returns because they invest in young and fast growing companies. These businesses have more room to expand, so even small improvements in sales or profits can lead to big jumps in their stock prices. Since the fund holds many such high growth companies, the overall return can rise quickly when the market conditions are good. However, this higher return potential always comes with higher risk.

Small-cap funds have higher expense ratios because it takes more effort and cost to manage them. Fund managers need to research many small companies, visit management, track their performance and find reliable information, which is harder to get compared to large companies. Small-cap stocks also have lower liquidity, so buying and selling them involves higher trading costs. All these extra efforts and costs add up, which is why small cap funds usually charge a higher expense ratio.

Since small-cap funds can fluctuate a lot, they are best used for long-term goals where you have enough time to ride out the ups and downs. Before adding them, make sure your portfolio already has a good mix of large-cap and mid-cap funds to provide stability.

Once that base is in place, you can usually allocate around 5-15% of your equity portfolio to small-cap funds, depending on your risk appetite and comfort with volatility. The idea is to use small-caps as a growth booster, not the core of your portfolio.

Small-cap companies may take time to scale and weather business cycles, staying invested for at least 7-10 years is generally recommended. This helps you ride through volatility and gives the underlying companies time to realise growth.

Short-term holding (say 1-2 years) increases the risk of seeing negative results given the volatility.

Yes, beyond the general market risk:

• Liquidity risk: Small-cap stocks trade less frequently, so buying or selling them in large quantities can be harder. This can move the price more than expected, creating liquidity risk for the fund.
• Business risk: Smaller companies may face more competitive threats, may not have diversified operations, and may be more vulnerable to economic shocks.
• Underperformance: A fund may hold many small-cap stocks but if they under-perform broad market or mid/large caps during a cycle, the fund’s returns may lag.

Being aware of these helps you set reasonable expectations.