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Mutual Funds

Best Small Cap Mutual Funds to Invest in 2023

Written by - Akshatha Sajumon

December 15, 2022 8 minutes

Small-cap funds, as the name suggests, are equity funds that invest a minimum of 65% of their funds in equity/stocks of small-cap companies. Many large-cap companies that we know today, like Britannia, Titan, etc were once small-cap companies that established themselves as market leaders over many years. Investors often see the potential of small-cap companies and invest in them now to reap the benefits of growth in the future.

Here is some useful information on small-cap fund investments and some top performing funds in this segment.

What are Small Cap Funds?

To understand small cap funds, it is important to know the meaning of market cap or market capitalisation. Market capitalization measures a publicly-traded company’s worth by taking the share price of the company and multiplying this by the total number of shares outstanding. Every company has a different size and depending on its size, it could either be a large-cap, mid-cap, or small-cap company.

Small-cap funds are equity mutual funds that invest primarily in small-cap companies. Small-cap companies are those which rank beyond 250 with regard to full market capitalisation. Small caps stocks are known to have high return potential but have many risks that come along. Small-cap companies have small-scale operations and also restricted access to resources. Thus, they often face survival risks when there is an economic downswing. 

Reasons to Invest in Small-cap funds

Here are some benefits offered by small-cap funds:

  • Small-cap funds have a wider range of options for investment as compared to large cap, mid-cap or sector funds.
  • Small cap companies have higher growth prospects because of new/emerging business segments that grow at a faster pace.
  • Because of the availability of new technologies and products/services, these also have far greater potential to quickly gain market share.
  • Small cap companies are influenced by company-specific factors more than by macroeconomic factors.
  • As compared to large and mid-cap stocks, small-cap stocks can recover faster during economic recoveries.

Best small-cap funds to invest in 2023

Based on historical performance, here are the top investment options within small-cap funds.

  1. Kotak Small Cap 
  2. Axis Small Cap Fund 
  3. HDFC Small Cap Fund
  4. Quant Small Cap Fund
  5. DSP Small Cap Fund

Kotak Small Cap Fund

About Fund

The principal objective of Kotak Small-cap fund is to generate capital appreciation through investment in various equity & equity-related securities of small-cap companies. The scheme is designed to offer potential growth benefits offered by small-cap securities.

Inception Date24th February 2005
Benchmark NameNIFTY Smallcap 250 Total Return Index
Fund ManagerMr. Pankaj Tibrewal
Expense ratio1.89%
Fund typeOpen-ended
RiskVery high

Historical Returns of the Fund (annualised)

6-month1-Year3-Year5-Year10-Year
10.49%-1.31%32.76%15.78%18.79%

Axis Small Cap Fund 

About Fund

This is an open-ended equity scheme which primarily invests in small-cap stocks. The primary aim of this scheme is to generate long-term capital appreciation through equity investments in small cap companies. It follows the bottom-up approach of investment.

Inception DateNovember 29, 2013
Benchmark NameNIFTY Smallcap 250 Total Return Index
Fund ManagerMr. Anupam Tiwari
Expense ratio1.91%
Fund typeOpen-ended
RiskVery high

Historical Returns of the Fund (annualised)

6-month1-Year3-Year5-Year10-Year
14.64%5.96%27.74%10.08%

HDFC Small Cap Fund

About Fund

HDFC Small Cap Fund aims to offer opportunities to investors for long-term growth and liquidity through investments in a well-diversified basket of equity securities, primarily of small-cap companies (minimum 65%). 

Inception Date3rd April 2008
Benchmark NameS&P BSE 250 SmallCap Total Return Index
Fund ManagerMr. Chirag Setalvad
Expense ratio1.99%
Fund typeOpen-ended
RiskVery high

Historical Returns of the Fund (annualised)

6-month1-Year3-Year5-Year10-Year
21.92%8.05%29.19%13.17%17.90%

Quant Small Cap Fund

About Fund

The scheme is designed to help investors generate capital appreciation through investments focused on small cap companies. The fund manager aims to maintain a well-diversified portfolio at all times to maximise inventor returns. It is best suited for investors who have a 3-5 year investment horizon.

Inception Date24th November 1996, 2013
Benchmark NameNIFTY Smallcap 250 Total Return Index
Fund ManagerMr. Ankit Pande and Mr. Vasav Sahgal
Expense ratio2.67%
Fund typeOpen-ended
RiskVery high

Historical Returns of the Fund (annualised)

6-month1-Year3-Year5-Year10-Year
21.32%7.74%54.75%23.48%15.80%

DSP Small cap Fund

About Fund

This is a very high risk scheme that is designed to help investors generate capital appreciation through investments focused on small cap companies. The benchmark of the fund is S&P BSE 250 Small Cap TRI. It is best suited for investors who have a 3-5 year investment horizon.

Inception Date14th June 2007
Benchmark NameS&P BSE 250 Small Cap TRI
Fund ManagerMr. Vinit Sambre and Mr. Resham Jain
Expense ratio1.84%
Fund typeOpen-ended
RiskVery high

Historical Returns of the Fund (annualised)

6-month1-Year3-Year5-Year10-Year
11.68%%3.40%30.72%11.32%20.63%

Who can invest in Small Cap Funds?

Small cap funds can be an ideal investment choice for the following investor categories:

  • Investors who are looking to benefit from the higher growth potential of small cap companies.
  • Long-term investors who have a higher risk appetite and sufficient prior exposure to market volatility.
  • Investors who can remain invested for a horizon of at least 5 years.

Ways to Invest in Small Cap Funds

If you are looking to invest in small-cap funds, you can do so by using the Fisdom app. Here are some easy steps to follow:

  1. Download and launch Fisdom app on your smartphone
  2. Click on Équity on the home screen and select ‘small-cap’ option
  3. Click on ‘invest’ against a fund of your choice from the available list
  4. You can either opt for ‘SIP’ or ‘Lumpsum’ investment depending on your preference
  5. Enter the amount to invest
  6. Next, enter your basic details as seen on your phone screen
  7. Complete the payment process to start your investment

Things to Consider Before investing in Small Cap Funds

Every investment form has different return and risk profiles. Investing in small-cap funds makes sense for investors who have long-term financial goals. For new investors, here are some factors to consider before making an investment in small-cap funds:

Fund Returns

Every investor would want higher returns from their investment. According to past trends, many small-cap funds may tend to outperform large-cap funds. However, an investor has to carefully select a fund basis his/her financial goals and after studying the historical performance of the specific fund. No fund can guarantee high returns and therefore, investors have to be prepared to face lower returns from small-cap funds too.

Risk 

Small-cap funds can pose a significant amount of risk since they are heavily impacted by market volatility. There is always a high-risk-return tradeoff when it comes to small-cap funds. Therefore, only investors with a high-risk appetite and long-term goals must go for small cap funds. 

Growth potential of stocks 

Small cap funds are ideal to add growth to an investor’s portfolio. These can have tremendous growth potential as compared to large caps which are generally at the peak of the growth curve. Investors must pick funds which invest in stocks of fast-growing companies and have stronger potential to be future market leaders.

Diversification benefits

Mutual funds offer the benefit of diversification to investors, especially those investing in small-cap stocks. This way, investors can balance the risk-return tradeoff and enjoy the benefits of diversification. Investors must try and spread their investment across small cap, mid-cap, and large-cap stocks instead of purely focusing on small-cap funds which are generally high risk.

End Note

Small cap funds are ideal for investors with a higher risk appetite and long-term financial goals. All Small-cap funds highlight the market risk involved, therefore, investors must carefully analyse their investment objectives against the mutual funds’ before choosing a small-cap fund.Small-cap funds, as the name suggests, are equity funds that invest a minimum of 65% of their funds in equity/stocks of small-cap companies. Many large-cap companies that we know today, like Britannia, Titan, etc were once small-cap companies that established themselves as market leaders over many years. Investors often see the potential of small-cap companies and invest in them now to reap the benefits of growth in the future.

Here is some useful information on small-cap fund investments and some top performing funds in this segment.

Frequently Asked Questions

Should I invest in small-cap funds?

If you have a good risk appetite and have long-term financial goals, then you can consider investing in small-cap funds. These offer higher growth potential as compared to large-cap funds, but come with associated market risks.

Which are the top small-cap funds in India?

A few of the top-performing small-cap funds are:

  • Kotak Small Cap 
  • Axis Small Cap Fund 
  • HDFC Small Cap Fund
  • SBI Small Cap Fund 
  • ICICI Prudential Small-Cap Fund

How long should I stay invested in small cap funds?

The thumb rule is that the longer you stay invested in top-performing small cap funds, the higher the returns you can get. The recommended time period for investment in small cap funds is 5 to 7 years.

Is it the right time to invest in small cap funds?

Based on an investor’s asset allocation preferences, a small-cap fund investment can be considered as an investment option, especially for long-term financial goals.

Does it make sense to invest in small cap or large cap funds?

Depending on an investor’s risk profile, he/she can choose either small cap or large cap or both investment options. Large cap funds tend to remain relatively stable during market volatility, and small cap funds offer higher growth potential in the long run.

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