Small Cap Mutual Funds

With Small Cap Mutual Funds, you invest in the potential of India's emerging companies, focusing on companies ranked below the 250th position in terms of market capitalisation. They invest in small companies which are comparatively riskier but they can generate high returns over other funds.

Avg. category returns 37%-53% for 3 Years

Diversifies by investing in various sectors

Offer higher returns than large-cap mutual funds

Withdraw Anytime

Get Started Learn More on Mutual Funds

What Are Small Cap Mutual Funds?

Small-Cap Mutual Funds invest in companies that are often in their early growth stages or operate in niche sectors. These companies are smaller in size, ranked below 250 in terms of their market capitalisation. The performance of these funds can be more unpredictable compared to Large-Cap Funds due to the inherent business risks and market sensitivity of smaller companies. Investors in these funds should have a long-term perspective and be prepared for periods of sharp price fluctuations.

Small Cap Mutual Funds SIP Calculator

Calculate SIP returns based on past data

Select Fund

SIP
One-Time

Select Frequency

Disclaimer : Projections/estimations is backtested using historical data

Start SIP in Small Cap Mutual Funds as low as Rs. 50

Daily SIP | Weekly SIP | Monthly SIP

Invest Now SIP Calculator

Benefits of Investing in Small Cap Funds

Investing in small-cap funds comes with unique advantages over other types of mutual funds. These benefits are as follows:

High Growth Potential
Small-cap companies often grow at a faster pace than larger firms, offering the possibility of significant returns. As these companies are in their growth phase, their stock value can increase rapidly with successful business developments.
Portfolio Diversification
Investing in small-cap funds can spread your risk across various sectors and industries, minimising the impact of a single underperforming investment. This diversity can provide a buffer against market volatility
Access to Emerging Companies
Small-cap mutual funds allow you to invest in potential market leaders before they hit their peak, offering a unique opportunity to benefit from their growth trajectory from an early stage.
Price Undervaluation
These companies are often under the radar of large investors and analysts, possibly leading to undervaluation. This provides an opportunity to invest at a lower price before broader market recognition drives up valuations.
Quick to Benefit from Economic Improvements
Small companies can quickly make the most of good economic conditions. This can mean faster profit increases, which might boost their stock prices sooner than bigger companies.
Innovation and Niche Dominance
Small-cap companies often lead in new technologies or specialised markets. Investing in them means you could benefit as they pioneer new products or services, potentially becoming highly attractive targets for bigger companies to buy.

Who Should Invest in Small Cap Funds?

The following individuals can invest in small-cap mutual funds:

Investors Looking for Long-Term Capital Growth
Investing in small-cap mutual funds is ideal for investors seeking higher returns over a long period. It is because the companies they invest in have higher growth potential than larger companies and can capitalise better on market trends. Hence, investing in small-cap funds for a longer duration can result in higher returns.
Investors with High-Risk, High-Reward Investment Approach
Investors who are aiming for higher returns and are willing to accept the associated risks may find small-cap funds suitable. These funds can offer significant returns during market rallies, especially in a growing economy.
Investors seeking Variety in their Portfolio
If your portfolio is already heavy on large-cap funds and mid-cap mutual funds, adding Small Cap Funds can offer diversification. These funds invest in companies that have more growth potential but also carry more risk - a different segment of the market. Adding investments in these smaller companies can provide balance to your portfolio, potentially reducing overall risk and improving returns over the long term.

How to start investing in Small Cap Mutual Funds with INDmoney?

Ready to invest in a small-cap mutual fund? Here’s how you can get started easily with INDmoney.

Step 1
Get the INDmoney app, sign up, and complete your KYC to open your investment account at no cost.
Step 2
With your account set up, go to the mutual fund section in the app, and look for small-cap mutual funds.
Step 3
Pick a small-cap mutual fund by checking its past performance, risk level, fund size, fees, and what it invests in.
Step 4
Decide if you want to invest a regular amount periodically (SIP) or all at once (lump sum). On the fund’s page, choose “One-time” for lump sum or “SIP” for investing in instalments.
Step 5
Enter how much money you want to put in as SIP or lump sum.
Step 6
Arrange your payment. For SIP, you can set up an auto-pay with your bank or UPI. For a lump sum, you can pay through UPI, net banking, NEFT, or RTGS.

Limitations of Investing in Small Cap Mutual Funds

Investing in the best small-cap mutual funds can come with certain limitations. Hence, you must consider these drawbacks before investing:

Higher Volatility
Small-cap stocks are prone to larger price swings, influenced by market sentiment and investor reactions, which can lead to significant value fluctuations in your fund. This volatility is partly due to lower trading volumes, making these stocks less stable during market fluctuations.

Market Sensitivity

Small-cap companies typically feel the effects of market downturns more acutely. In tough economic times, these firms can see their values drop more dramatically, as they may not have the financial strength of larger companies to endure such periods.

Longer Investment Horizon
Small companies require a much longer time to grow and give potential returns, making the investment horizon longer than other equity mutual funds.

Points to consider before investing in Small Cap Mutual Funds

When thinking about investing in Small Cap Mutual Funds, you must weigh these factors:

Risk Tolerance
Understand that small-cap funds come with higher volatility. These funds can see rapid and significant value changes due to their sensitivity to market fluctuations and the inherent risks of smaller, less established companies. Assess whether you can afford potential short-term losses and the stress of watching your investment's value change frequently.
Investment Horizon
Small-cap investments typically require a long-term perspective. Given their volatility, these funds may need time to ride out market lows and capitalise on highs. If your investment goal is many years away, small caps offer the potential for substantial growth, but they may not be suitable for short-term financial needs.
Market Research
A thorough, exhaustive research is a must before investing in small-cap funds. Understand the fund's strategy, the sectors it targets, and the specific risks associated with its holdings. Look into the fund's historical performance, the experience of its fund managers, and its approach to selecting companies to ensure it aligns with your investment goals and risk appetite.

Frequently Asked Questions

To choose the best small-cap fund to invest in 2024, you must look at the fund's portfolio and check its past performance. In addition, you must look at the fund manager's performance to make an informed decision.

You must invest for more than 5 years in small-cap funds to earn higher returns, as small-cap companies take more time to grow.

A small-cap fund invests a minimum of 65% of the total corpus in the equities of small-cap companies, ranking beyond the 250th position based on their market capitalisation.

Small-cap mutual funds do not have any lock-in period. However, you may have to pay the exit load fee if you sell the funds within the period of exit load, which varies from one fund to another.

No, small-cap funds carry high risks due to their price volatility and the difficulty of smaller companies to withstand market shocks. If you are investing in small-cap mutual funds for the short or medium term, you are taking a somewhat higher risk. However, investing in these funds for a longer period mitigates the risks and lets you earn higher returns.

Small-cap mutual funds are taxed in the following two ways:

Dividend Taxation: Dividends are added to the investor’s income and taxed as per their applicable tax bracket.
Capital Gains Tax: If you invest in small-cap funds for less than a year and redeem the profit, it is known as short-term capital gains (STGC), and you have to pay a tax of 15%. However, investing in these funds for one year or more results in long-term capital gains (LTGC). LTGC up to Rs. 1 lakh is tax-free, but if it exceeds Rs. 1 lakh, you must pay 10% tax on the exceeding amount.

The following are some of the notable features of small-cap mutual funds:

High Returns: These funds give higher returns than large-cap and mid-cap mutual funds, as they have higher chances of growth in the future.
High Risk: Small-cap mutual funds carry higher risk of losses, as they tend to have fewer resources than mid-cap or large-cap companies.
Minimum Investment: According to the mandate of the Securities Exchange Board of India (SEBI), small-cap mutual funds invest 65% of the total corpus in small-cap companies.