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Top 5 Small-Cap Mutual Funds to Consider for High-Growth Potential in 2025

Explore the best small cap mutual funds for savvy investors and learn key strategies.

Article 12

Small cap mutual funds invest in companies whose market capitalisation is below Rs. 5,000 crores. While investing in mutual funds, it is important for you as an investor to be aware of the benefits and the risks involved with various types of funds. Even though small cap funds have the tendency to perform better than large-cap or mid-cap funds, these funds carry higher risks.

This article will help you understand what small-cap mutual funds are, who should invest in them, what to expect, and the benefits vs. risks associated.

Who should invest in small cap mutual funds?

Small cap mutual funds are better suited for experienced investors who already have a well-diversified portfolio that they can expand from. They are very volatile in nature, and thus, suitable for investors with a high risk appetite who are willing to deal with market fluctuations. The best time to invest in them is if you have a long investment period since small-cap funds normally perform well in the long term even though their short-term returns seem unstable.

Key takeaways

  •  Small cap mutual funds offer several benefits including high growth potential, flexible investment options, and portfolio diversification.
  • However, you must also be aware of the risks involved which include low liquidity and high volatility.
  •  Some of the best small cap mutual funds in India include Quant Small Cap Fund, Franklin India Smaller Companies Direct Fund, and Axis Small Cap Fund, among others.

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Best small cap mutual funds

Fund name

Category

Risk

1Y returns

Fund size

Invesco India Small Cap Fund

Equity

Very High

64.1%

Rs. 5,092 crores

Axis Small Cap Fund

Equity

Very High

44.5%

Rs. 23,771 crores

Tata Small Cap Fund

Equity

Very High

53.8%

Rs. 8,878 crores

Quant Small Cap Fund

Equity

Very High

57.4%

Rs. 25,534 crores

IDBI Small Cap Fund

Equity

Very High

24.3%

Rs. 160 crores

Canara Robeco Small Cap Fund

Equity

Very High

45.9%

Rs. 12,247 crores

Bank of India Small Cap Fund

Equity

Very High

54.6%

Rs. 1,422 crores

Edelweiss Small Cap Fund

Equity

Very High

49.3%

Rs. 4,141 crores

Nippon India Small Cap Fund

Equity

Very High

51.6%

Rs. 60,999 crores

Franklin India Smaller Companies Direct Fund

Equity

Very High

51.4%

Rs. 14,423 crores

Factors to consider before investing in small cap mutual funds

Risk factor

Small cap mutual funds are highly volatile compared with mid cao or large cap funds. High fluctuations in NAV make them riskier.


Investor expertise

These funds are well suited for an investor who has good knowledge and experience about investing in mutual fund schemes, can closely monitor the funds, and come up with a sound investment strategy.


Investment term

Small cap mutual funds are appropriate for long-term investors. They may not be suitable for those who have short-term investment plans since they are highly volatile.

Types of Mutual Funds

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# Mutual Funds

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Debt Mutual Funds

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Large-cap Mutual Funds

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Mid-cap Mutual Funds

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Small-cap Mutual Funds

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Benefits of small cap mutual funds

High growth potential

Small cap companies generally follow aggressive growth strategies which can yield high long-term growth potential


Portfolio diversification

Incorporating small cap funds in your investment portfolio can give better returns when large or mid-cap funds are underperforming, thus maintaining a balanced investment portfolio.


In-depth research by fund managers

Fund managers do detailed analysis to identify the best-performing stock, thus allowing you to diversify your portfolio with calculated risks.


Flexible investment options

You can invest in the lump sum scheme and Systematic Investment Plans (SIPs). A lump sum requires a minimum investment of Rs. 1,000, while SIPs may be flexible, starting as low as Rs. 100 per instalment.

Risks involved in small cap mutual funds

High volatility

Small cap funds tend to face significant price fluctuations, and thus are unstable and risky investment options, especially if the market does not meet your expectations.


Unpredictable performance

The performance of small cap funds varies with stock selection, market time, and other factors. Thus, the returns are not as predictable.


Low liquidity

The participation by institutional and retail investors in small cap mutual funds is relatively low. This results in a situation wherein liquidity is poor, and transactions are more difficult in buying or selling units.

Also read: Section 195 of Income Tax Act

Conclusion

Small cap mutual funds provide an opportunity to tap into the high-growth potential and outperform large cap funds over the long term. You would need to assess your risk profile, investment objectives, and your investment horizon.

The Bajaj Finserv Mutual Fund Platform allows you to choose from over 1,000 mutual fund options, depending on your risk appetite and investment goals. Additionally, you could use the platform’s mutual fund calculator to compare mutual funds.

Frequently asked questions

Are small cap mutual funds good for new investors?

No, small cap mutual funds are not a good investment idea for beginners as they are very volatile. They would be better suited for experienced investors who know how to handle market risks.

What may be the expected return when one invests in small cap funds?

Small cap funds generally offer stable returns over the long term, but short-term fluctuations are common, resulting in volatile performance. 

How risky are small cap mutual funds?

Small cap mutual funds are highly risky investment securities, and prices of such funds can go down or up appreciably. 

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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Disclaimer

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

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(ii) carry customized/personalized suitability assessment.

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:

Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.


Disclosure
: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finance Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.

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