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Small-Cap Equity Funds: Basics, Benefits and More

Explore the world of small-cap mutual funds and discover their historical performance and returns. Discover the best small-cap mutual funds for 2023. Gain insights into potential investment opportunities in this dynamic sector.


Small-cap equity funds are a type of mutual fund that invests in small-cap companies with a market capitalization of below Rs 5,000 crore. These funds are suitable for investors who have a slightly higher risk appetite and a long-term approach as they carry a higher level of risk than large-cap funds. 

Small-cap stocks often fly under the radar of large institutional investors due to their limited liquidity, which allows these stocks to rise in value based on their own merits, increasing the chances of organic price growth. 

Investing in small-cap funds also provides diversification benefits. In this article, we will discuss the things to consider as an investor, how small-cap equity funds work, who should invest in them, and the top 5 small-cap equity funds in India.

Things to consider as an investor

Before investing in small-cap funds, investors should consider the following factors:

Risk appetite: Small-cap funds are suitable for investors who have a slightly higher risk appetite and a long-term approach as they carry a higher level of risk than large-cap funds.

Portfolio surplus diversification: Investors should consider their portfolio and allocate a portion of their investment surplus as an asset allocation with 10-15% allocated to small-cap funds.

Amount: Investors should allocate an amount that they can afford to lose as small-cap funds are highly risky investments.

Advisors: Investors should consult with investment advisors to determine if small-cap funds are suitable for their investment goals and risk tolerance.

Mutual funds: Investors should understand the different categories of mutual funds, including small-cap, mid-cap, and large-cap funds and how they work.

How do Small-Cap Equity Funds work?

Small-cap equity funds invest in small-cap companies with a market capitalization of below Rs 5,000 crore. These funds are managed by professional fund managers who select stocks based on their research and analysis. 

The fund manager invests the money collected from investors in a diversified portfolio of small-cap stocks. He then aims to generate returns for investors by investing in small-cap companies that have the potential to grow and generate higher returns.

Who should invest in Small-cap Equity Fund?

Small-cap equity funds are suitable for investors who have a higher risk tolerance and a long-term investment horizon. Investors who are looking to chase higher returns but have the patience to ride the volatility with long-term investment objectives can consider these funds.

Investment advisors recommend investors to dedicate a small portion of their portfolio towards small-caps. This is because small-cap stocks offer a great opportunity to earn huge returns. However, investors should be patient while investing in small-cap schemes as they are highly risky investments

Top 5 Small-cap Equity Funds in India

According to ET Money, the top 5 small-cap equity funds in India based on SIP returns as of November 2023 are:

  • Axis Small Cap Fund
  • SBI Small Cap Fund
  • HDFC Small Cap Fund
  • Kotak Small Cap Fund
  • Nippon India Small Cap Fund

The NIFTY Smallcap 100 index, which tracks the performance of small-cap companies in India, can be compared to the broader NIFTY 50 index to understand the performance of small-cap stocks against the overall market.

Here’s a brief overview of the small-cap performance against NIFTY based on the provided information:

  • The NIFTY Smallcap 100 index provides information on the spot, futures, and options of small-cap companies in India
  • Small-cap funds are known for their higher growth potential, and small-cap value index funds have been observed to outperform the S&P 500 in the long run
  • Small-cap stocks offer significant benefits, including the potential for higher returns, as they often fly under the radar of large institutional investors, allowing for organic price growth
  • Small-cap funds are considered to be highly risky investments and are recommended for investors with a higher risk tolerance and a long investment horizon
  • Small-cap funds have the potential to offer returns of more than 100% in a single day, but they are also highly sensitive to market conditions and can suffer losses during downturns
  • It has been observed that small-cap funds tend to have a better ability to generate above-market returns, and small-cap companies operate on low debt, making their business model more focused
  • Small-cap index funds aim to replicate the performance of small-cap indices like NIFTY Smallcap 250, BSE 250 Smallcap, etc., and offer the potential for maximum returns


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