Are you looking for an ultimate mutual fund to earn extra income? Then Small Cap Mutual Funds are waiting for you. By investing in these funds, you can make higher long-term growth.

In this article, you will analyse small cap fund meaning, what are the best small cap funds and who should invest in them for great wealth creation in mutual funds.

Small Cap Mutual Fund Overview

Mutual Funds that normally invest in small-cap stocks of small companies are known as Small Cap Mutual Funds. The companies these fund invests in typically have a market capitalization of under Rs 5,000 crore.

Although these companies are not as successful as large cap companies but they can still outperform these large companies over time as they have a potential of higher growth with their innovative vision.

Small cap funds aims to provide a disclosure of the emerging and innovative small cap companies that may not be the case with large cap companies or funds.

What are the Characteristics of a Small Cap Funds?

Small Cap Mutual Funds carry several features or characteristics that can be effective for many investors looking for a reliable fund, these may include:

1Higher Growth Potential

Small cap companies are considered to have higher growth of the returns as compared to the large cap funds and companies which are more established firms.

Investment Focus

These small cap funds generally focus on investing in small companies which are in their early stages of growth but may have potential for expansion in the future.

Volatility

Small companies are more volatile than large cap and mid cap stocks, as their stock values can be affected significantly due to market volatilities and economic conditions.

Long Term Investment Horizon

Small cap funds are generally reliable for investors who have the perspective of long term investment through SIP (Systematic Investment Plan).

Diversification

These funds object to investing in a diversified portfolio of small cap companies across different sectors, which helps in reducing the risk associated with a single company.

Professional Management

These small cap funds are actively managed by professional fund managers with expertise in their fields. They help you to make good and informed investment plans.

5 Best Small Cap Mutual Funds in India

In this section, you will learn about the top 5 small cap mutual funds in which you can invest in 2025:

Nippon India Small Cap Fund

This fund is known for its strong performance and diversified portfolio. It has a fund size of Rs 5,029 crore with a yearly return of 28.65%. It has 98.73% investment in equities.

Bandhan Small Cap Fund

It is popular for its consistent returns and significant AUM growth. It has a fund size of Rs 10,244 crore with a yearly return of 17.01%. It has 88.43% investment in equities.

Invesco India Small Cap Fund

It is famous for its robust investment strategies. The fund size of this fund is not specified but it has a yearly return of 12.58%. It has a 97.93% investment in the equities.

Quant Small Cap Fund

This fund has an investment strategy of using a quantitative approach for the stock selection process. It has a fund size of Rs 26,222 crores but its yearly returns are not specified.

Tata Small Cap Fund

This fund mainly focuses on small cap funds with great quality to make long term growth. Its fund size and yearly returns are not specified. But it has a 1.70% expense ratio.

What is Risk in a Small Cap Mutual Funds?

As you know mutual funds are subject to market risks, that is if you invest in a mutual fund you may also face loss sometimes.

Small Cap Mutual Funds also contain some risks associated with their investment and which are:

Market Volatility

Small cap funds are more volatile as compared to large cap and mid cap funds, so they may affect more by the change in market conditions.

Liquidity Risk

As they have lower transaction volumes than large caps, it is really hard to buy or sell shares without affecting stock prices for them.

Limited Financial Resources

The small cap funds have limited or less financial and capital resources as compared to large cap stocks making it difficult for them to endure the economic downturns.

Less Analyst Coverage

These funds or stocks often receive less attention from analysts and institutional investors, which leads to a lack of information and research and, therefore, a failure to make informed decisions.

Higher Failure Rate

Small cap have high failure rate than large cap funds. These condition increase the risk as the whole investment will be gone if the company goes bankrupt or underperforms.

If you doubt whether these funds are suitable for you or not, then the next heading has got you covered.

Who Should Invest in Small Cap Mutual Funds?

Described below are the investors who can invest in these funds:

Long-term Investors

If you can investment in mutual funds for a long time without missing one also you are looking for long term steady growth, then you invest in these funds.

Risk Tolerant Investors

These funds are highly suitable for you if you have a high risk tolerance and can withstand some short term losses.

Growth-oriented investors

Investors seeking capital appreciation and willing to invest in companies with high growth potential can consider investing in these funds.

Diversification Seekers

Small cap mutual funds provide access to diversified sectors and industries reducing overall portfolio risk. If you want a diversified portfolio you should invest in these funds.

Young Investors

The young investors who have longer time limit before they need to access their funds are highly suitable for small cap stocks.

Investors with a Focus on Innovation

The Small cap funds generally invest in small companies which are more innovative than many large cap companies. These companies may have early access to market trends as well.

Active Investors

Investors who prefer actively managed funds and are interested in the research and analysis that goes into selecting small cap stocks, may consider investing in these funds.

Conclusion

In conclusion, a mutual fund offers you a variety of range of funds to invest in and Small Cap Mutual Funds are one of the best in them. These fund offers you a long term growth with diversified portfolios, professional advices, long term investment horizon, etc.

Through SIP (Systematic Investment Plan) you can increase the benefits you are earning from the small cap funds. So, if you want a long term, stable, reliable and higher growth you should invest in Small Cap Mutual Funds through SIP.