Small Cap Mutual Funds
As the name suggests, small-cap funds invest mainly in stocks of small-cap companies. According to SEBI, barring the top 250 companies as per market capitalization, all are small-cap companies. Therefore, small-cap stocks are ranked 251st and beyond on the stock exchange. They generally have a market cap of less than Rs 5,000 crore. Small-cap funds allocate at least 65% of their investments to small-cap stocks. They can offer higher returns than other equity funds as the companies they invest in have a high scope of growth.
These companies are small in size and have significant growth potential. And when they grow, their share prices also surge sharply. Small-cap companies are typically considered to have substantial growth potential. However, it is important to understand that they are also high-risk investments. They tend to see sharp fluctuations when the market is volatile. Therefore, small-cap mutual funds are more suitable for aggressive investors who can take higher risks.
Best Small Cap Mutual Funds
List of the top-performing small cap mutual funds sorted by returns with their AUM and Expense Ratio.
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AUM ₹9248 Cr •
Expense 0.41%
AUM ₹61646 Cr •
Expense 0.68%
AUM ₹5842 Cr •
Expense 0.41%
AUM ₹27161 Cr •
Expense 0.64%
AUM ₹9464 Cr •
Expense 0.34%
AUM ₹14045 Cr •
Expense 0.89%
AUM ₹16920 Cr •
Expense 0.68%
- ▲ 28.37%
AUM ₹2439 Cr •
Expense 0.42%
AUM ₹411 Cr •
Expense 1.39%
AUM ₹1613 Cr •
Expense 0.46%
AUM ₹4374 Cr •
Expense 0.38%
AUM ₹33842 Cr •
Expense 0.68%
AUM ₹16307 Cr •
Expense 0.84%
AUM ₹12453 Cr •
Expense 0.47%
AUM ₹5842 Cr •
Expense 0.97%
AUM ₹23952 Cr •
Expense 0.56%
- ▲ 23.79%
AUM ₹4651 Cr •
Expense 0.69%
AUM ₹3424 Cr •
Expense 0.84%
AUM ₹8435 Cr •
Expense 0.76%
AUM ₹33285 Cr •
Expense 0.67%
How To Invest In Small Cap Mutual Funds
Follow these steps to start investing in small-cap funds:
- Open the INDmoney app and log in with your credentials.
- Navigate to the "Mutual Funds" section within the app.
- Use the filter options to select "Small-Cap Funds" to view the available options.
- Decide whether to make a lump sum investment or set up a Systematic Investment Plan (SIP) for regular contributions.
- Enter your desired investment amount and confirm the transaction.
Key Features of Investing in Small Cap Funds via INDmoney
Free Mutual Fund Account: Setup your mutual funds account online in less than 3 minutes.
Zero Commission Funds: Invest in Direct Plan Small Cap funds with zero commissions.
25+ Small Cap Funds: Find 25+ Small Cap Mutual Funds listing on INDmoney. You can explore all small funds by directly searching small cap funds on search or navigating to Mutual Funds section.
Free Portfolio Analytics: Get in-depth insights on your small investments with INDmoney. Make informed and data-driven decisions on your next investment move.
Risks of Investing In Small Cap Mutual Funds
Now that we have understood the small-cap fund, let's also look at the risks involved:
Highly Volatile: A small-cap fund is highly volatile, especially in the short to medium term. It can fluctuate wildly during stock market swings, resulting in huge losses. This makes it riskier than a large-cap fund. You should invest in small-cap funds to meet your long-term investment objectives.
Liquidity Risk: Institutional participation in small-cap stocks is low, and even retail investors don't invest extensively in them. This exposes small-cap funds to liquidity risks.
Factors To Consider Before Investing in Small Cap Funds
Since small-cap funds carry a higher risk than large-cap and mid-cap funds, it’s important to consider these factors before investing in them.
Investment Risk: Undoubtedly, even the best-performing small-cap funds carry high risk, even if they give solid returns. Therefore, when picking a small-cap fund, choose the one with a history of performing better than the benchmark and other small-cap funds to ensure a good return on your investment.
Investment Returns: You can look to allocate a portion of your portfolio to the small-cap fund despite higher risks because not investing in it could mean missing out on significant potential returns.
Cost of Investment: Small-cap equity funds incur a cost known as the fund's expense ratio. While selecting a small-cap fund, consider your net profit after such expenses. According to SEBI guidelines, the expense ratio for these funds is limited to 2.50%.
Past Performance: While selecting a small-cap fund, look at the past performance of at least 4-5 years. A good performance indicates effective stock selection by the fund manager and suggests the scheme can navigate difficult market conditions successfully.
Investment Objective: Even the top-performing small-cap mutual funds can experience significant declines when the market conditions are poor. Therefore, to get the most gains from your investment, park your funds for long-term goals like children’s education, buying a home or retirement plan.
Taxation Rules of Small Cap Mutual Funds
Investors have to pay taxes on gains made from selling small-cap mutual funds. The tax is called capital gains tax and depends on your holding period.
Short-term Capital Gains Tax or STCG
If you invested in a small-cap fund for less than 12 months, gains earned are taxed at a flat rate of 20%.
Long-Term Capital Gains Tax or LTCG
If you invested in a small-cap fund for over 12 months, gains up to ₹1.25 lakh are exempt from taxes. Any gain above this amount is taxable at 12.5%.
Frequently Asked Questions
Who Should Invest in a Small Cap Fund?
As an investor, if you are willing to take more risks, then you should consider small-cap equity funds. These funds can offer stellar returns when the markets are doing well. However, when markets turn bearish, they are among the worst impacted and may take a long time to recover. You should invest in a small-cap fund to meet your long-term investment objectives. It is ideal to allocate some portion of your portfolio to small-cap stocks to not miss out on capital appreciation.
Why are the expense ratios of Small Cap Mutual Funds higher than other funds?
The expense ratios of Small Cap Mutual Funds tend to be higher than those of other types of mutual funds for several reasons:
- Active Management: Small-cap funds are usually actively managed due to the need for thorough research. Active management involves higher costs related to research, analysis, and trading.
- Market Volatility: Small-cap stocks are generally more volatile than large-cap stocks, leading to increased trading activity as fund managers may frequently adjust their portfolios in response to market changes. This higher turnover can elevate transaction costs.
- Limited Economies of Scale: Many small-cap funds have lower assets under management (AUM) compared to larger funds, which means that fixed costs (like management fees) are spread over fewer assets, resulting in a higher expense ratio.
- Regulatory Compliance: Meeting regulatory requirements and maintaining transparency also incurs costs that contribute to higher expense ratios for small-cap funds.
How long should you invest in small-cap funds?
Investors with a long-term investment horizon should pick small-cap funds. Ideally, investors should have a holding period of 5-10 years to make the most of their investment.
What are the disadvantages of small-cap funds?
Small-cap funds are prone to stock market fluctuations and volatility. These companies may underperform when the market conditions are weak. Small-cap stocks have lower liquidity than large-cap and mid-cap stocks, making buying and selling them difficult.
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