Best Small Cap Mutual Funds

Small-cap mutual funds invest in smaller, emerging companies with high growth potential. These funds are popular among investors seeking to capitalise on the rapid expansion of small companies, although they come with higher risks due to market volatility. Investing in small-cap mutual funds can be rewarding for those willing to take on more risk in exchange for potentially higher returns. Below, we explore the top small-cap funds, their advantages, and disadvantages, and the top ten small cap mutual funds.

What are the Best Small Cap Mutual Funds?

Small-cap mutual funds put money into very small companies' shares- valued below Rs. 5000 crores in the share market. These funds mostly buy small-cap company stocks, with maybe a tiny portion in larger firms sometimes. Though riskier, they can give higher returns than mutual funds buying mid-sized or large company shares. To know about well-performing small-cap mutual fund options to consider buying in 2024, read on to:

Top Ten Small Cap Mutual Fund

Here are the top small-cap mutual funds:

Overview of Best Small Cap Fund

Bandhan Small Cap Fund
This fund invests in high-potential small-cap companies to deliver substantial long-term growth. Its aggressive investment strategy has resulted in significant returns, making it a popular choice among risk-tolerant investors.

Tata Small Cap Fund
Tata Small Cap Fund invests in emerging companies with robust business models and high growth potential. The fund follows a disciplined approach, focusing on bottom-up stock picking, making it a preferred choice for high long-term returns.

Invesco India Small Cap Fund Direct
Invesco India Small Cap Fund Direct invests in a diversified portfolio of small-cap companies with solid growth prospects. The fund is known for its well-researched stock picks and disciplined investment approach, making it a solid option for aggressive investors.

Bank of India Small Cap Fund
This relatively new fund has made a mark with its impressive returns. It invests in a wide range of small-cap stocks that exhibit strong fundamentals and are expected to deliver superior performance over time.

Nippon India Small Cap Fund
Nippon India Small Cap Fund is one of the most popular small-cap funds, with a track record of strong performance. It focuses on under-researched and undervalued companies, allowing investors to benefit from their early-stage growth.

Edelweiss Small Cap Fund
Edelweiss Small Cap Fund invests in high-growth small-cap companies, focusing on diversification across sectors. The fund aims to capture opportunities in emerging businesses well-positioned to benefit from India’s economic development.

Canara Robeco Small Cap Fund
Canara Robeco Small Cap Fund invests in small companies with high growth potential. The fund adopts a bottom-up stock selection process, identifying companies with solid fundamentals and growth prospects.

Axis Small Cap Fund
Axis Small Cap Fund is known for its quality stock selection and strong research capabilities. It invests in small-cap companies with sound business models, sustainable competitive advantages, and strong management teams.

HSBC Small Cap Fund
HSBC Small Cap Fund invests in companies positioned to benefit from India’s economic growth. The fund focuses on companies with strong business models, good management, and the ability to sustain growth in a competitive market.

IDBI Small Cap Fund
IDBI Small Cap Fund invests in promising small-cap companies that have the potential to grow significantly in the future. The fund’s strategy identifies undervalued companies with growth potential, making it a good option for long-term investors looking for exposure to small caps.

Advantages of Top Small Cap Mutual Fund

Here are the key benefits of top small cap mutual funds:

Potential for High Returns
Small companies can grow big rapidly, giving very good returns to early investors later.

Price Volatility
Share prices of small companies move up and down sharply, allowing people to earn more by buying low and selling high.

Business Innovation
Small companies constantly improve their products, services, marketing, etc., unlike large firms, according to the latest trends.

Diversification for Investment Portfolio
Adding small cap funds balances the overall investment portfolio across company sizes for optimising gains.

Disadvantages of Small Cap Mutual Fund

Below are the disadvantages of small cap mutual funds:

High Volatility
Small-cap funds are highly sensitive to market fluctuations, making them more volatile than large and mid-cap funds.

Higher Risk
The risk of losing principal investment is higher in small-cap funds as these companies may face challenges in scaling, managing competition, or sustaining profitability.

Liquidity Issues
Small-cap stocks can have lower trading volumes, which may make it difficult to buy or sell shares at desired prices.

Who Should Invest in a Small Cap Fund?

Small-cap mutual funds are very high-risk, high-return investment options. The top small-cap funds can provide 25%+ returns yearly but may sometimes have negative results. This happens because compared to medium or large firms, the share prices of small companies tend to fluctuate sharply—especially when stock markets in India or globally face downturns.

Hence, these funds suit investors who are willing to take aggressive risks and aim for bigger profits over the short term but lack sufficient time or skill to self-manage many investments. Instead, small-cap funds can play the high-risk, high-reward part in an otherwise balanced mutual fund portfolio that may contain more stable debt schemes but cannot provide very high gains overall.

Taxation on Small Cap Mutual Fund

How small cap mutual fund returns are taxed:

Tax on Dividend Income
Any dividends earned from small-cap funds are added to your overall income, and you pay tax as per your tax slab. Also, dividends over Rs 5000 attract 10% TDS yearly.

Tax on Profits from Selling Small Cap Fund Units
Holding units for 1 year or longer means investing for the long term. If you withdraw after 1 year and gains exceed Rs 1 lakh, you need to pay 10% tax on the amount above 1 lakh. Below this, it is tax-free.

Withdrawing before 1 year classifies it as a short-term investment. Here, a 15% tax applies on profits and any exit load funds levy.