Best Small Cap Index Funds for Maximum Returns

Small cap index funds are a type of passively managed mutual funds that are intended to replicate the performance of a particular market index, like Nifty 50, bank nifty, etc. These funds might deliver greater returns and the risk involved in index funds depends on the underlying index. In this article, you will learn more about various aspects of small-cap index mutual funds.

What is a Small Cap Index Mutual Fund?

As mentioned above, a small-cap index fund is a type of passively managed mutual fund. Before moving on to the small-cap index mutual funds, it is important to understand the broader types of mutual fund investment methods used by investors – active investing and passive investing. In active investing, the fund manager tracks all the stocks, and studies and analyses them to decide whether to buy, sell, or hold the investment. 

In passive investing, on the other hand, the fund manager doesn’t actively make decisions about which stocks to buy or sell based on his analysis and prediction about the market. 

Hence, small-cap index funds are a type of passively managed mutual funds that primarily invest in stocks of companies with a relatively small market capitalization generally less than Rs.5,000 crore.  These funds are designed to match the performance of a specific market index, like Nifty 50. In other words, index funds offer the same return and involve the same risk represented by the index it tracks. 

For example, if an index fund tracks the Nifty 50, it will mimic the performance of the Nifty 50.

Advantages of Small Cap Index Funds

Here are the key benefits of investing in small-cap index funds:

• Low cost: Since the fund manager is not actively involved in market research and trading of stocks, small-cap index funds are a low-cost investment option.
• Higher growth potential: While small-cap mutual funds are relatively riskier in the short term, they have the potential to deliver higher returns in the long run.
• Unbiased investing: The process of investing in these funds is automated and regulation-based. This eliminates the human bias in the stock selection.

Note: Mutual fund investment is subject to market risk. Please read all related documents carefully before investing. 

Top 10 schemes of Small Cap Index Mutual Funds in India sorted by last 5-year returns

Listed below are the top 10 small-cap index mutual funds: 

How to invest in Small Cap Index Funds? 

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 index 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 index mutual fund you want to invest in depending on your investment goals and risk tolerance.
• You can make your first investment through a SIP plan, like half-yearly, monthly, daily SIP, or lumpsum as per your investment objective.

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

In index funds, fund managers have a negligible role in market research and selecting stocks to be part of your portfolio. The investment strategy aims to match the returns of a specific market index. Index mutual funds have a track record of outperforming active funds. Index funds can be ideal options for new investors who have just started exploring mutual fund investments.  

FAQs

1. Which are the best Small Cap Index Mutual Funds to invest in 2024?

Here is the list of some of the best mutual funds to invest in for long term in India in 2024:

- Aditya Birla Sun Life Nifty Smallcap 50 Index Fund

- Motilal Oswal Nifty Smallcap 250 Index Fund

- Nippon India Nifty Smallcap 250 Index Fund

- Axis Nifty Smallcap 50 Index Fund

- Edelweiss Nifty Smallcap 250 Index Fund

Note: Index funds replicate the performance of a particular market index and returns presenting past performance is no guarantee of future results.

2. Is it good to invest in small-cap index funds?

Small cap index funds offer many benefits, including:

- Significant growth potential

- Passive investment ensures low cost

- Unbiased and no subjective decision-making in the stock selection

3. Are small-cap index funds risky?

All types of market investments carry some amount of risk and small cap funds carry higher risk and offer greater returns than large caps. The risk involved in small cap index funds depends on the underlying index.

4. What is the Nifty Small Cap 250 index fund?

The Nifty small cap 250 index is a smaller group of the broader Nifty index, which replicates the performance of the top 50 companies listed on the National Stock Exchange (NSE). As the name suggests, the fund invests in Nifty Smallcap 250 companies or the leading small-cap companies with a market capitalization between Rs. 250 crore and Rs. 5000 crore.