How Do Small Cap Funds Work?

Fund managers of small-cap equity funds invest at least 65% of their holdings in small-cap equities. These companies are usually chosen by investors who are willing to take a chance for positive returns. However, since small-cap funds rely heavily on fund composition, rash selections can turn your investments into a loss.

These funds invest in companies that have the potential to make it to the top 250 in terms of market capitalization in future. While these funds are highly risky and more volatile than other equity-focused funds, they can also offer high returns in the long run.

Advantages of Small Cap Mutual Funds

Here are all the advantages of small-cap mutual funds that investors can avail in the long run:

High Returns- Small-cap funds hold the potential to offer significantly higher returns than mid-cap or even large-cap funds. It’s all because of the strong growth potential that these companies hold.
Low NAV- The Net Asset Value (NAV) of small-cap mutual funds is usually low. So, investors can buy more units and gain significant profits when the market is favourable.
Diversification- Small-cap funds can help investors to diversify their investment portfolio. Thus, lowering the overall investment risk and boosting chances of your finances staying protected even when the market suffers.

Why Invest in Small-Cap Mutual Funds?

Investing in small-cap mutual funds can be a smart decision for investors looking to diversify their portfolios and potentially earn higher returns. Small-cap mutual funds invest in stocks of companies with a smaller market capitalization. Here are some reasons why investing in small-cap mutual funds can be a good idea:

➥ High Growth Potential: Small-cap companies have high growth potential, as they are still in their early stages of development. They are often innovative and agile, which allows them to respond quickly to market changes and trends. By investing in the best small-cap mutual funds, investors can gain exposure to these companies and potentially benefit from their growth.

➥ Diversification: Investing in small-cap equity-balanced mutual funds can help diversify your portfolio, as small-cap stocks are not usually part of larger indices. By investing in small-cap mutual funds, investors can gain exposure to a wider range of companies and industries, reducing their overall portfolio risk.

➥ Higher Returns: Small-cap stocks have historically outperformed large-cap stocks over the long term, with higher returns and greater volatility. By investing in small-cap mutual funds, such as Aditya Birla Sun Life Small Cap Fund, investors can potentially benefit from higher returns and grow their wealth over time.

➥Lower Valuations: Small-cap companies are often undervalued by the market, as they are not as well-known or established as larger companies. This can present an opportunity for investors to invest in these companies at a lower valuation, potentially benefiting from future growth in their stock prices.

➥ Active Management: Small-cap mutual funds like Canara Robeco Small Cap Fund are actively managed by experienced fund managers who specialize in investing in small-cap companies. These fund managers conduct extensive research and analysis to identify companies with strong growth potential and a sound business model, helping to maximize returns and minimize risk.

➥ Long-Term Investment: Investing in small-cap mutual funds requires a long-term investment horizon, as small-cap stocks can be volatile in the short term. However, over the long term, small-cap mutual funds, such as Edelweiss Small Cap Fund, have the potential to generate higher returns than other investment options.

Top 10 Small Cap Funds in 2025

Quant Small Cap Fund - Growth

Quant small cap fund was launched in 1996. It is one of the most popular small cap funds and has given an equal return as its benchmark. The fund has 77 stocks in its portfolio of which major allocation has been made in energy, consumer, financial etc sector. The fund major allocation is in mid cap and small cap category. It is one of the best choices for investors who are looking to invest money for at least 3-4 years and looking for very high returns.

Tata Small Cap Fund

Tata Small Cap Fund was launched in 2018. It is an open-ended equity mutual fund that has 51 stocks in its portfolio of which major allocation has been made in materials, industrials,consumer, financial etc. It is specially designed to provide long-term capital appreciation by focusing on small caps companies, which have the potential for significant growth.

Tata small cap fund could be a good choice for investors who want to invest for at least 3-4 years in the category as it carries the potential to outperform in the coming years.

Kotak Small Cap Fund

Kotak small cap fund was launched in feb, 2005. It is an open-ended equity mutual fund that has 74 stocks in their portfolio in which major allocation has been made in industrials, consumer, materials, and healthcare sectors. It is a special design for long term capital appreciation. The fund focuses on small cap companies which have high growth potential. Kotak Small cap fund can be a good investment choice for investors who want to invest for at least 4-5 years with good return.

Nippon India Small Cap Fund

A top-performing fund, Nippon India Small-Cap Fund has consistently outperformed its benchmark as well as the category average returns.

The fund has been ranked among the top funds due to its high scores in various parameters like concentration, consistency, risk-adjusted score, capture ratio & volatility as per ZFunds ratings. Also, the fund has the highest score in the important metric of valuations. Nippon India Small Cap Fund is a great investment in the Small Cap Category.

Franklin India Small Cap Fund

Franklin India small cap fund was launched in Jan 2006. It is an open-ended equity mutual fund that has 90 stocks in their portfolio in which major allocation has been made in industrials, consumer, financial and materials sectors. It is a special design for long term capital appreciation. It is best for investors who are looking to invest money for at least 3-4 years and looking for very high returns.

Edelweiss Small Cap Fund

Edelweiss Small Cap Fund is ranked highest in the small-cap category because of its high returns since Inception. It was launched in February 2019 and since then it has outperformed its benchmark. Edelweiss Small Cap Fund has 71 stocks in its portfolio of which major allocation has been made to emerging sectors like engineering, chemical, construction & healthcare, etc. The Fund also has a major allocation of approximately 49% in Mid-cap stocks.

Edelweiss Small Cap Fund can be a good choice for investment for the long term, as it is among the top funds in the category.

HSBC Small Cap Fund

HSBC small cap fund was launched in May 2014. It is an open-ended equity mutual fund that has 97 stocks in their portfolio in which major allocation has been made in industrials, consumer, materials, financial, technology etc. sectors. It is designed for long term capital appreciation. The Fund also has a major allocation of approximately 68% in Mid-cap stocks.

It is best for investors who are looking to invest money for at least 4-5 years and looking for very high returns.

Canara Robeco Small Cap Fund

Canara Robeco small cap fund is an open-ended equity mutual fund that was launched in Feb 2019. It has 93 stocks in their portfolio in which major allocation has been made in the industrials, financial, materials, healthcare, etc. sector. It is best for investors who are looking to invest money for at least 3-4 years and looking for very high returns.

Axis Small Cap Fund

Launched in 2013, Axis Small Cap Fund has consistently outperformed its benchmark to date by significant margins. The fund has made it to the Top 12 because of its high scores across many parameters including performance against benchmark, capture Ratio, risk-adjusted score,& consistency as per ZFunds Ratings.

Axis Small Cap Fund is also an excellent choice for long-term investments and can generate high risk-adjusted returns for its investors.

SBI Small Cap Fund

SBI small-cap fund has delivered good returns in the past years because of which it is among the top 12 funds in the category. It has given the highest average returns in the previous 5-year period. The fund has consistently outperformed its benchmark and category average returns with significant margins as per the ZFunds ratings.

SBI small cap can be a good choice of investments in the category for long-term investments.

How to Invest in Small Cap Funds Through ZFunds?

ZFunds is one of the best mutual fund apps. You can download the ZFunds mutual fund app from the Google Play Store and follow the steps mentioned below to invest in small-cap mutual funds online.

Install the ZFunds app and upload any of your ID proofs issued by the central or state government, like an Aadhar card, PAN card, Voter ID card, driver's license, passport, etc.
You also need to upload your address proof to complete the KYC process.
Log in through your personal credentials.
Search for a small cap mutual fund you want to invest in depending on your investment goals and risk tolerance.
Now select whether you want to make your first investment through a SIP plan, like half-yearly, monthly, daily SIP, or lumpsum as per your investment objective.
Now enter the amount and click on “Invest Now”.

After the successful investment, the units will be allotted and the investment will be reflected in 2-3 working days in your ZFunds account.

Conclusion

Small-cap mutual funds can be a great investment opportunity for those looking to diversify their portfolio and potentially earn higher returns on their investments. While small-cap funds are considered riskier than their large-cap fund or mid-cap fund counterparts, they can also offer greater growth potential, particularly over a long period of time. However, with so many small-cap mutual fund schemes available in the market, choosing the right one can be a daunting task even for an experienced investor. Here, we will take a closer look at some of the best small-cap mutual funds in India, analyzing their performance, investment philosophy, and management team to help you make an informed investment decision. You can invest in any of these on ZFunds and earn great returns on your investment. Kick-start your small-cap mutual fund investment today!