What Are Small Cap Mutual Funds? All you need to know

Equity mutual funds are categorised based on various factors such as market capitalization, investing style, sectors, etc. Based on the market capitalization, mutual funds are categorised as large-cap funds, Mid-cap funds, Large & Mid cap funds, and Small-cap funds. You can choose the category of mutual funds based on your goal and risk profile. In this article, let’s know more about small cap mutual funds. 

What is Small Cap Mutual Fund?

Small cap mutual funds are the equity mutual funds that majorly invest in stocks of companies with small capitalization. That means the investment is into stocks that are below the top 250 companies on the stock exchange and the market capitalization of such stocks is below INR 5,000 crores. There are small-cap funds offered by almost every mutual fund house such as SBI Mutual Fund, HDFC Mutual Fund, Kotak Mutual Fund, etc. You can compare them and then choose the best suitable fund for you.

The fund manager of the small-cap mutual fund invests at least 65% of the corpus or the portfolio into small-cap stocks. As the portfolio of small-cap stock constitutes stocks of companies that are young and looking for opportunities to expand, the fund is highly vulnerable to losses and volatility. As these funds are aggressive in nature, has the potential to deliver higher returns also. Let’s take a look at the benefits of investing in small-cap mutual funds.

  • Higher return potential

Small cap mutual funds have a higher return potential as you are investing in young and new companies that have higher growth potential with the growing economy. Let’s take a look at the performance of some of the top small-cap mutual funds below. 

Scheme Name Returns Expense ratio
1 year 3 years 5 years Since inception
Canara Robeco Small Cap Fund-Direct-Growth 20.21% 46.75% 31.77% 0.47%
Quant Small Cap Fund – Direct-Growth 10.10% 55.02% 35.80% 15.85% 0.62%
Edelweiss Small Cap Fund- Direct-Growth 17.47% 40.15% 32.40% 0.57%
Kotak Small Cap Fund-Direct-Growth 11.05% 40.55% 28.90% 20.85% 0.59%
Nippon India Small Cap Fund-Direct-Growth 19.47% 42.52% 28.18% 25.54% 1.02%
SBI Small Cap Fund-Direct-Growth 22.52% 36.24% 26.21% 26.67% 0.74%


Small cap mutual funds can deliver higher returns for example Quant small cap, Canara Robeco small cap, Edelweiss small-cap fund, etc. mentioned above have delivered higher returns over the last three years. SBI Small Cap Fund offered by SBI Mutual Fund has been delivering consistently good returns since inception. You can compare all the funds and then choose the best suitable fund for your risk profile and investment goals.

  • Suitable for long-term investment goals

Small-cap mutual funds are suitable for investors with a long-term investment perspective. As equities are considered to deliver higher and inflation-beating returns over the long term, small-cap mutual funds can help you achieve your long-term goals. 

You can invest in small-cap mutual funds in both lump sum and systematic investment routes. The investment into small-cap mutual funds can be conveniently done online. However, while investing in small-cap mutual funds, the investor needs to keep in mind the high-risk profile of the funds, the expense ratio, and the tax implications of investing in small-cap mutual funds.

Tax Implications of Small Cap Mutual Funds

Your investment into small cap mutual funds for less than a year is considered short-term. Any short-term capital gains from small-cap mutual fund investments are subjected to a 15% tax plus applicable cess. Any long-term capital gains (more than a year) from small-cap mutual funds investments are subjected to a long-term capital gain tax of 10% plus applicable cess without indexation provided the gain in a financial year is more than INR 1 lakh. 

Who Should Invest in Small Cap Mutual Fund?

Investors who are willing to take risks and looking for investments to save for their long-term financial goals can consider investing in small-cap mutual funds. 

Small-cap funds have the potential to deliver inflation-beating higher returns over the long term. However, it is also important to consider certain factors while investing in small-cap mutual funds such as performance, investment risk, investment cost, tax, and your financial goals. When it comes to investment, it is important to compare and then make a wise decision.

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