Top Small Cap Mutual Funds

Small cap mutual funds invest in small cap companies which are characterized by a market capitalization of less than Rs.5,000 crores. They invest primarily in small cap stocks with a very small portion of money being invested in larger market categories. Although small-cap funds often outperform large or mid-cap funds, they are also considered to be much riskier.

To have a better understanding of small cap mutual funds, you may be interested in reading about some of the top small cap fund direct growth options that you can make an investment in by 2025.

What is a Small Cap Mutual Fund?

Small-cap funds invest a fair portion of the investable assets in equity or equity-related holdings of small-cap corporations. According to the Securities and Exchange Board of India (SEBI), at least 80 percent of the total assets of small-cap schemes are to be invested in small-cap firms. SEBI defines small-cap companies as companies with market capitalization below 250th rank in the market, that is, a market cap of less than Rs. 5000 crores.

An important thing to note is that small-cap funds are associated with a significant risk. Small-cap companies are also very sensitive to market fluctuations, especially the lows and highs in the market. But such stocks are equally promising in terms of good small cap mutual fund returns. Just imagine that a small company has much potential to develop, and when it happens, its share can quickly increase.

• Small cap mutual fund CAGR is normally 15-18%, which has balanced risk and rewards.
• Small cap funds have the tendency of being highly volatile.
• The optimum investment horizon is a minimum of 2-3 years.

Essential Features of Small Cap Mutual Funds for Investors

A Small Cap fund is required to invest at least 65% of its assets in Small Cap companies, as stated by the Securities and Exchange Board of India. These funds have the following features:

1. Risk and volatility: Because of their smaller size, the companies are affected by both significant and minor events. Their stock prices can increase dramatically in response to a moderate rise in revenue or profit, whether from deregulation, market growth, or winning contracts. Conversely, a small setback can lead investors to quickly lose confidence in the company.
2. High returns: While Small Cap mutual funds have a higher chance of failing, they can also deliver small cap fund returns that are much greater than those of other types of funds if they manage to weather tough times. Although the returns may eventually stabilize, the top Small Cap mutual funds can achieve returns exceeding 30% in certain years.
3. Cost of Investment: The expense ratio of Small Cap equity funds is capped at 2.50% as per SEBI regualtions. When selecting a Small Cap fund, consider your net earnings after these costs.

How to Start Investing in Small Cap Mutual Funds Easily

1. Identify Your Goals: You should clearly define your financial goals and the extent of risks that you are ready to take. Do you want long-term prosperity, your children to continue education or you want to retire? The targeted objective will make you stay on course and make the appropriate choice of a fund.
2. Select a Platform: Select a quality investment. Although you may access mutual funds via other platforms, it offers you all the tools directly regardless of whether you prefer to explore funds or be assisted by an expertly-curated list.
3. Complete KYC: Ensure you are KYC-compliant by submitting your PAN, Aadhaar and address proof. This process is quick and paperless with Religare Broking and you can begin to invest hassle-free.
4. Research Funds: Research small cap funds in terms of their past performance, the money manager and the expense ratio.
5. Make the Selection: Select a fund that suits your financial objectives.
6. Investment Mode: You must decide whether you will invest in lump sum or you want to invest through a SIP small cap fund (Systematic Investment Plan).
7. Invest: Pay either online or offline.
8. Monitor Performance: Regularly review your portfolio’s performance and adjust your strategy accordingly.

Important Points to Consider Before Investing in Small Cap Mutual Funds in India

• Investment Objectives: Small-cap funds are only suitable to long term investors who are willing to invest over 5 years.
• Expense Ratio: Asset Management Companies (AMCs) charge an expense ratio to manage funds that covers expenses incurred in the administration, legal charges and fund managers commissions.
• Past Performance: A review of past trends provides an indication of how a fund has performed under different circumstances in the market; helping to assess how a fund will perform in the future.
• Skills of the Fund Manager: The fund manager decides which securities to buy and sell; therefore, it is important to look into his/ her prior performance before investing in the fund.
• Portfolio Analysis: The sectors and industries on which the fund is active can be analyzed to reveal the real value of this fund and its compatibility with your expectations.
• Direct Plans vs. Regular Plans: Regular plans are accompanied by broker commissions and raise the costs. Conversely, on the direct basis, plans are available with AMCs or discount brokers which reduce the costs.
• Risk Factor: Small-cap funds are typically far more volatile than mid or large-cap funds, exhibiting considerable changes in NAV.
• Expertise of the Investor: Such funds require deep analysis and proper strategy, and thus are more suitable to experienced investors.
• Investment Term: They suit the people with a long-term investment horizon not the person seeking a quick gain.

Who Should Invest in a Small Cap Fund?

Some investors may suit small-cap stocks based on their risk tolerance level and personal goals and investment timeframe. The following are a few categories of investors who may consider investing in small-cap funds.

• Long-Term Investors: Small-cap investments will be too volatile in the short term hence are suitable only to those with a seven years or longer time frame. In the long-term, a small-cap fund has the potential of generating large returns.
• Diversification Seeker: In case you intend to diversify your investment portfolio, small-cap funds might help. This money invests in new and upcoming firms which are start ups and are all across industries. This diversification across various industries helps lower the risk of the entire portfolio as well as maximize returns. In case you desire to have funds that give an exposure to different market segments, then you can allocate the minor portion of your portfolio in small-cap funds.
• Risk Tolerance: Small cap stocks are highly volatile in comparison to large cap stocks in general. Small-cap funds may suit you fine, particularly when you are willing to accept more risk and are eager to take advantage of market ups and downs.
• Large Growth Expectations: Small-cap shares have large growth due to their investment in businesses that are in their initial stages. Thus, small-cap funds may be right when you want to get high growth and are prepared to accept greater volatility.

Pros of Small Cap Mutual Funds

High Growth Potential – Small cap companies have a greater growth potential, which may result in high returns in the long-run.