Investing in mutual funds is one of the most effective ways to create long-term wealth, and within that universe, small cap mutual funds have emerged as a popular choice for investors seeking high growth potential. Small cap funds primarily invest in companies ranked beyond the top 250 in terms of market capitalization — often smaller, agile businesses with strong potential to become tomorrow’s large and mid-sized corporations.
In this comprehensive guide, we’ll explore the 20 best small cap mutual funds in India, understand how they work, who should invest in them, and key factors to consider before making an investment decision.
What are Small Cap Mutual Funds?
Small cap mutual funds are equity schemes that invest at least 65% of their corpus in small cap stocks as defined by SEBI. According to SEBI’s categorization, small cap companies are those ranked 251st and beyond in terms of total market capitalization.
These companies usually have smaller revenue bases but higher potential for expansion. Because of their size, they can deliver exponential returns during favorable market conditions — but they also tend to be more volatile in the short term.
Why Invest in Small Cap Mutual Funds?
Small cap funds can significantly enhance your portfolio’s growth potential. Here’s why they’re worth considering:
1. High Growth Potential
Small cap companies often operate in niche sectors or emerging markets, giving them more room to grow compared to established large-cap companies.
2. Diversification Benefits
Adding small cap funds to a portfolio that already includes large or mid-cap funds can help balance risk and improve overall returns over time.
3. Compounding Over Long Term
Investors who stay invested for 7–10 years often witness the power of compounding as these small companies mature into industry leaders.
4. Professional Management
Small cap mutual funds are managed by experienced fund managers who identify promising small companies through research and analysis.
Risks Involved in Small Cap Funds
While the potential rewards are substantial, small cap funds come with higher volatility and risk.
- Market volatility: Small cap stocks can fluctuate sharply during market downturns.
- Liquidity risk: Smaller companies may have lower trading volumes.
- Longer recovery time: After a market correction, small caps usually take longer to bounce back.
Ideal investors are those who can handle volatility and stay invested for at least 5–7 years.
How to Choose the Best Small Cap Mutual Fund
Before investing, consider the following factors:
1. Past Performance and Consistency
Look at long-term (5–10 year) performance rather than short-term gains.
2. Fund Manager Track Record
A skilled fund manager with a consistent history of outperforming benchmarks adds confidence.
3. Expense Ratio
A lower expense ratio ensures better net returns over the long term.
4. Portfolio Diversification
Check if the fund is diversified across sectors rather than concentrated in a few high-risk stocks.
5. AUM (Assets Under Management)
An extremely large AUM can make it difficult for the fund to find opportunities in the small cap space, while too small an AUM may indicate limited investor confidence.
20 Best Small Cap Mutual Funds in India (2025 Edition)
Here’s a list of top-performing small cap mutual funds based on long-term performance, consistency, and management quality. (Data as of late 2025 from leading fund houses and performance trackers.)
| Fund Name | 3-Year CAGR | 5-Year CAGR | Expense Ratio | Fund Manager |
|---|---|---|---|---|
| Nippon India Small Cap Fund | 27.4% | 24.8% | 0.74% | Dhrumil Shah |
| SBI Small Cap Fund | 25.6% | 22.9% | 0.68% | R. Srinivasan |
| Kotak Small Cap Fund | 24.3% | 21.1% | 0.76% | Harish Krishnan |
| Axis Small Cap Fund | 23.2% | 20.7% | 0.59% | Shreyash Devalkar |
| HDFC Small Cap Fund | 26.1% | 22.3% | 0.72% | Chirag Setalvad |
| ICICI Prudential Small Cap Fund | 25.7% | 21.9% | 0.65% | Anand Sharma |
| Quant Small Cap Fund | 32.5% | 27.8% | 0.80% | Sandeep Tandon |
| Canara Robeco Small Cap Fund | 24.0% | 20.5% | 0.62% | Vishal Mishra |
| Franklin India Smaller Companies Fund | 23.7% | 19.8% | 0.70% | Janakiraman R |
| DSP Small Cap Fund | 24.8% | 21.0% | 0.71% | Vinit Sambre |
| L&T Emerging Businesses Fund | 25.5% | 20.4% | 0.73% | Soumendra Nath Lahiri |
| Tata Small Cap Fund | 26.2% | 22.1% | 0.66% | Satish Chander |
| Union Small Cap Fund | 27.0% | 21.7% | 0.63% | Vinay Paharia |
| Edelweiss Small Cap Fund | 23.0% | 19.5% | 0.69% | Harshad Borawake |
| Mirae Asset Small Cap Fund | 25.1% | 20.8% | 0.60% | Neelesh Surana |
| HSBC Small Cap Fund | 24.6% | 20.1% | 0.71% | Rohan Maru |
| Mahindra Manulife Small Cap Fund | 26.8% | 21.5% | 0.67% | Krishna Sanghavi |
| Aditya Birla Sun Life Small Cap Fund | 22.4% | 18.7% | 0.75% | Jayesh Gandhi |
| Invesco India Small Cap Fund | 24.2% | 20.3% | 0.68% | Pranav Gokhale |
| Quant ELSS Small Cap Advantage Fund | 30.5% | 26.9% | 0.81% | Sandeep Tandon |
Note: Returns are indicative and may vary based on market conditions.
Top Performing Small Cap Funds (Highlights)
1. Nippon India Small Cap Fund
One of the largest and most consistent performers in the category, this fund focuses on identifying high-growth small companies with strong management. Ideal for investors seeking aggressive growth over the long term.
2. SBI Small Cap Fund
A steady performer managed conservatively, SBI’s small cap fund combines quality stock selection with consistent returns, suitable for moderately aggressive investors.
3. Quant Small Cap Fund
Known for its tactical and momentum-based investment approach, this fund has outperformed peers in recent years. However, its higher volatility requires a higher risk appetite.
4. HDFC Small Cap Fund
Backed by experienced fund management, this fund invests in fundamentally strong small cap businesses and maintains a balanced approach to growth and risk.
5. Axis Small Cap Fund
Ideal for conservative investors within the small cap category, Axis maintains quality-focused small cap picks and a disciplined investment process.
Taxation on Small Cap Mutual Funds
Small cap mutual funds are equity-oriented, so they follow equity taxation rules:
- Short-term capital gains (STCG): If sold within 1 year, taxed at 15%.
- Long-term capital gains (LTCG): Gains above ₹1 lakh in a financial year are taxed at 10% without indexation.
SIP or Lump Sum – Which is Better?
For small cap funds, SIP (Systematic Investment Plan) is generally more suitable than lump sum investment.
- SIP helps average out the cost of purchase during market volatility.
- It encourages disciplined investing over time.
- You can start SIPs with as low as ₹500 per month in most funds.
However, if markets are at attractive valuations, a lump sum can also yield great returns when held for the long term.
Who Should Invest in Small Cap Funds?
Small cap mutual funds are best suited for:
- Investors with long-term horizons (7+ years)
- Those with moderate to high risk tolerance
- Investors looking to diversify equity portfolios
- Individuals seeking to maximize growth potential
Key Takeaways
- Small cap funds can deliver exceptional long-term returns, but volatility is inevitable.
- Diversify your investments and don’t allocate more than 20–25% of your portfolio to small cap funds.
- Invest through SIPs for smoother returns and reduced market timing risk.
- Review performance annually and ensure your investments align with your financial goals.
Conclusion
The 20 best small cap mutual funds in India offer some of the most exciting opportunities for wealth creation in the next decade. These funds tap into emerging businesses that can become tomorrow’s market leaders. While they come with higher risk, disciplined investing, patience, and long-term vision can help you reap substantial rewards.
If you are an investor looking to add growth and diversification to your mutual fund portfolio, consider including one or two small cap funds from the list above and invest systematically through SIPs.
Disclaimer:
This article is intended solely for educational and informational purposes. It should not be considered financial, investment, or trading advice. Mutual fund investments, especially in small cap funds, are subject to market risks, including high volatility and potential capital loss. The performance data, fund details, and returns mentioned here are based on publicly available information as of the time of writing and may change with market conditions.
We are not registered with SEBI, RBI, or IRDAI as financial, investment, or portfolio advisors. Investors are strongly advised to conduct their own research and consult a certified financial advisor before making any investment decisions. Past performance does not guarantee future returns. Always invest based on your risk tolerance, financial goals, and time horizon.