Previously we discussed the Top 10 large-cap mutual funds and mid-cap mutual funds in this article, we will discuss the top 10 small cap mutual funds in India.
A small-cap mutual fund is a fund that invests majorly in small-cap companies as per market capitalization. As per SEBI regulations, a small-cap fund is required to invest a minimum of 65% of its assets in small-cap companies through equity.
Advantages:
- Attractive Valuation: Small-cap funds invest in small-cap companies majorly, so there are various companies that are available at cheaper and attractive valuations.
- Very High Growth Potential: Companies in these funds have very high growth potential because of their size and flexibility to change. The companies have the potential to become mid & large-cap companies in the future.
Top 10 small-cap mutual funds
| S.No. | Fund Name | 3-Yr Annualized Performance |
| 1 | Quant Small Cap Fund Direct Plan-Growth | 40.21 % |
| 2 | Bank of India Small Cap Fund Direct-Growth | 34.65 % |
| 3 | Canara Robeco Small Cap Fund Direct-Growth | 34.26 % |
| 4 | Kotak Small Cap Fund Direct-Growth | 31.30 % |
| 5 | Edelweiss Small Cap Fund Direct-Growth | 29.93 % |
| 6 | Nippon India Small Cap Fund Direct Plan Growth Plan | 29.19 % |
| 7 | Union Small Cap Fund Direct-Growth | 29.14 % |
| 8 | Tata Small Cap Fund Direct-Growth | 28.25 % |
| 9 | ICICI Prudential Small Cap Fund Direct Plan-Growth | 27.38 % |
| 10 | Axis Small Cap Fund Direct-Growth | 27.28 % |
Source: Morningstar
1. Quant Small Cap Fund Direct Plan-Growth – Small cap mutual funds
Fund analysis:
The fund has delivered an exceptionally good performance. The fund is investing predominantly in small-cap companies. The fund is rated 5-star by Morningstar.
The risk grade is high, and the returns grade is high. The fund follows a blended style of investing. The risk is spread across companies with the top 10 holdings consisting of 38.96%.
The fund has a high risk (measured by standard deviation) than the category average.
| Pros | Cons |
| A top performer in its category. The fund captured the market well when it was rising. | Volatility is very high. |
2. Bank of India Small Cap Fund Direct-Growth – Small cap mutual funds
Fund analysis:
The fund is rated 5-star by Morningstar. The risk grade is below average, and the returns grade is high. The fund has a beta of 0.84 indicating that the movement of the fund is less relative to the market movement.
The fund follows a growth style of investing. The fund has a low risk (measured by standard deviation) than the category average.
| Pros | Cons |
| Risk Grade is below average. Well-diversified portfolio. | The fund has a high expense ratio. |
3. Canara Robeco Small Cap Fund Direct-Growth – Small cap mutual funds
Fund analysis:
The fund has outperformed the benchmark over different horizons. The risk grade is average and the returns grade is high. The fund has a well-diversified portfolio invested across market capitalization.
The top 10 holdings consist of a total of 22.88%. The fund is rated 5-star by Morningstar. The fund holds a good risk-to-reward ratio. The fund has low risk (measured in standard deviation) than the category average.
| Pros | Cons |
| The fund captured the market well when it was rising. Fund captured the market well when it was falling. | Less exposure to small-cap stocks. |
4. Kotak Small Cap Fund Direct-Growth – Small cap mutual funds
Fund analysis:
The fund has outperformed the category average in terms of trailing returns over different horizons. The risk grade is above average and the returns grade is above average.
The fund has a beta of 0.95 indicating that the movement of the fund is quite closely relative to the movement of the market.
The fund has a well-diversified portfolio of growth stocks consisting of 72 companies spread over different sectors and market-cap companies. The fund has a high risk (measured in standard deviation) than the category average.
| Pros | Cons |
| The fund has a favorable expense ratio. Fund captured the market well when it was falling. | Too much diversification may hamper the returns. |
5. Edelweiss Small Cap Fund Direct-Growth – Small cap mutual funds
Fund analysis:
The fund has outperformed the category and the benchmark with good margins. The risk grade is below average and the returns grade is above average.
The fund has delivered consistent returns over different horizons and has a well-diversified portfolio of 75 growth stocks, investing across market capitalization.
The fund has low risk (measured in standard deviation) than the category average.
| Pros | Cons |
| The fund captured the market well when it was falling. Relatively less downside risk. | Returns are above average. |
6. Nippon India Small Cap Fund Direct Plan Growth Plan – Small cap mutual funds
Fund analysis:
The primary objective of the scheme is to generate long-term capital appreciation by investing predominantly in small-cap companies and the secondary objective is to generate consistent returns by investing in debt and money market securities.
The risk grade is above average and the returns grade is above average.
The fund has a well-diversified portfolio across market capitalization and sectors. The fund has a high risk (measured in standard deviation) than the category average.
| Pros | Cons |
| Consistent compounder. The fund captured the market well when it rose. | The fund has a high expense ratio. |
7. Union Small Cap Fund Direct-Growth – Small cap mutual funds
Fund analysis:
The fund is rated 3-star by Morningstar. The risk grade is below average and the returns grade is above average. The fund has a well-diversified portfolio across market capitalization and sectors.
The top 10 holdings of the fund consist of 29.08% only and the fund holds a total of 54 stocks in the portfolio. The fund has low risk (measured in standard deviation) than the category average.
| Pros | Cons |
| Fund captured the market well when it was rising. The fund captured the market well when it was falling. | The fund has a high expense ratio. |
8. Tata Small Cap Fund Direct-Growth – Small cap mutual funds
Fund analysis:
The fund has outperformed the category average marginally. The risk grade is low and the returns grade is above average. The fund has a beta of 0.86 indicating that the fund’s movement is less relative to the market movement. The fund has low risk (measured in standard deviation) than the category average.
| Pros | Cons |
| Well-diversified portfolio.Relatively low risk. | Fund was not able to capture the market well when it was rising. |
9. ICICI Prudential Small Cap Fund Direct Plan-Growth – Small cap mutual funds
Fund analysis:
The fund’s objective is to seek to generate capital appreciation by predominantly investing in small-cap stocks. The risk grade is above average and the returns grade is average.
The fund is rated 3-star by Morningstar. The fund has a balanced approach towards investing by investing in aggressive stocks along with maintaining less downside. The fund has a high risk (measured in standard deviation) than the category average.
| Pros | Cons |
| The fund has high exposure to small-cap companies. Stable returns. | Exit Load of 1% before 1-Yr. |
10. Axis Small Cap Fund Direct Plan-Growth – Small cap mutual funds
Fund analysis:
The fund is giving consistent returns over the long term with an attractive risk-to-reward ratio. The fund is 5-star rated by Morningstar. The risk grade is below average and the returns grade is above average.
The fund has a beta of 0.80 indicating that the movement of the portfolio has very less relation to the market movement. The fund has outperformed the category and the benchmark.
The fund has low risk (measured in standard deviation) than the category average.
| Pros | Cons |
| Attractive risk-to-reward ratio.Consistent performer. | Fund was not able to capture the market well when it was rising. |
3 ETFs in Small Cap Category
Features of Small Cap Mutual Funds
Here are the features of small-cap mutual funds:
Invest in small-cap companies: Small-cap mutual funds invest primarily in small-cap companies. This is the most important feature of this type of mutual fund.
These companies are new players with high potential, high risk, and high returns. The growth horizon of these funds is higher than those of mid-cap or large-cap mutual funds.
High Risk: A big feature of small-cap mutual funds are risky funds when compared to large and mid-cap funds. This is because these companies are new and
High Returns: Small-cap mutual funds can yield high returns. This is because small-cap funds invest in small-cap stocks that have the potential to beat the market and inflation.
These funds experience high returns during a bull market and have the potential for extreme lows during a market fall.
Investment Horizon: The time period of investing in small-cap mutual funds is long-term. The minimum holding period is 7 years so that you can divide your risks and manage the market volatility that comes with small-cap mutual funds.
Volatile: Small-cap mutual funds are volatile in nature. They have the potential to provide high returns at high risk. They can be more sensitive to market upheavals than mid-cap or large-cap mutual funds.
Benefits of investing in top small-cap mutual funds
- High growth: The biggest benefit of investing in small-cap mutual funds is the high growth. Small-cap companies are new players and are in the early stages of growth. They have a higher growth potential than others and can be beneficial for new investors.
- Low pricing: Small-cap mutual funds have stocks that are priced well and have the potential of giving high returns. These stocks are new to the market and not actively followed, hence they are priced well and investors have the benefit of taking them on early.
- Add diversity: Investing in small-cap mutual funds adds diversification to one’s portfolio. They are volatile, have high potential growth, and help with boosting one’s overall growth.
- High returns: The greatest benefit of investing in small-cap mutual funds is the potential of maximizing high returns.
- Long-term investing: Small-cap mutual funds are seen as long-term funds. Investors are advised to take invested for 7 years minimum to balance out the risks taken during market falls.
- SIP and lumpsum option: Another benefit is the flexibility of investing. You can invest in a lumpsum manner or as a SIP investor every month. This means whether you are a small or big investor, risk-averse or not, you can reap the benefits of investing in small-cap mutual funds.
- Tax benefits: By investing in small-cap mutual funds for more than one year, your capital gains are under Long Term Capital Gain. Thus, LTCG of up to Rs. 1 lakh is not taxed and any gains above this amount are taxed at 10% without indexation!
Taxability of Small cap mutual funds
The taxability of small-cap mutual funds depends on the exposure and time horizon. An equity mutual fund has an equity exposure of greater than 65%.
For equity mutual funds, if the gains have been realized within 12 months of holding, then the applicable tax rate is flat at 15% on the gains (irrespective of your income tax bracket).
When the holding period exceeds 12 months, the capital gains of Rs. 1,00,000 are exempt from taxes. Any amount upwards of Rs. 1,00,000 is taxable at 10%, along with the provision of indexation benefits.
For debt mutual funds (funds with greater than 65% exposure to debt instruments) – the holding period is considered short-term if it is less than 36 months; anything more than that is long-term.
For the short term, the tax rate is in accordance with your income tax slab. On the other hand, for debt funds held for more than 36 months, the gains are taxable at a flat rate of 20% post-indexation (plus, some cess and surcharge are added).
A possible third case is hybrid funds (funds with a mix of debt and equity) it is simple, their tax treatment is supposed to be on the basis of the fund’s exposure to debt and equity.
If the hybrid fund is equity-focused: LTCG is charged at 10% on capital gains exceeding Rs. 1 lakh (without indexation), and STCG is charged at 10%.
If the hybrid fund is debt focused: LTCG is charged at 20% with indexation benefits, and STCG is charged per income tax slab.
Conclusion:
For any investor who wants to create wealth over a long-term horizon by taking high risks, investing in fast-growing new-age companies.
Investors investing in these funds should be cautious of high volatility during the investment journey
FAQs
Which mutual fund is best in the small-cap?
Here are some of the best mutual funds in small cap category:
- Quant Small Cap Fund Direct Plan-Growth – Small cap mutual funds
- Bank of India Small Cap Fund Direct-Growth – Small cap mutual funds
- Canara Robeco Small Cap Fund Direct-Growth – Small cap mutual funds
- Kotak Small Cap Fund Direct-Growth – Small cap mutual funds
- Edelweiss Small Cap Fund Direct-Growth – Small cap mutual funds
What are small-cap mutual funds?
A small-cap mutual fund is a fund that invests majorly in small-cap companies as per market capitalization. As per SEBI regulations, a small-cap fund is required to invest a minimum of 65% of its assets in small-cap companies through equity.
Is small-cap mutual fund safe?
Small-cap mutual funds are risky investments. They have the potential of yielding high gains and high losses due to their sensitivity to market changes.
Is a small cap good for SIP?
Yes, you can invest in small-cap mutual funds via SIP. It is the best way to balance risk and stay invested for the long term.
Which small-cap fund gives the highest returns?
Quant Small Cap Fund Direct Plan-Growth – Small cap mutual funds
What are the advantages of investing in small cap funds?
Here are two main advantages of investing in small cap funds:
Attractive Valuation: Small-cap funds invest in small-cap companies majorly, so there are various companies that are available at cheaper and attractive valuations.
Very High Growth Potential: Companies in these funds have very high growth potential because of their size and flexibility to change. The companies have the potential to become mid & large-cap companies in the future.
What are the taxability of small-cap mutual funds?
The taxability of small-cap mutual funds depends on the exposure and time horizon. An equity mutual fund has an equity exposure of greater than 65%.
For equity mutual funds, if the gains have been realized within 12 months of holding, then the applicable tax rate is flat at 15% on the gains (irrespective of your income tax bracket).
Disclaimer:
This is not recommendation advice, use it for educational purposes only. Mutual Fund investments are subject to market risks, read all scheme-related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including fluctuations in the interest rates.
The past performance of the mutual funds is not necessarily indicative of the future performance of the schemes.
