Small cap mutual funds are open-ended equity funds that invest primarily in equity and equity-related instruments of small cap companies. Such companies include organisations that have a market capitalisation of not more than Rs. 500 crore. Small cap companies have a lot of potential to grow and provide more returns than large and mid-cap funds. If you want to invest in small cap mutual funds, take a look at this list of 10 best small cap mutual funds of 2022. Read on!
The following table lists the top 10 small-cap mutual funds you can consider investing in:
|Name of the Small Cap Fund||Features|
|Axis Small Cap Fund Direct-Growth||Net Asset Value (NAV) as of October 20 2021: Rs. 67.64|
5-year annualised returns: 21.81%
Expense ratio: 0.37% per annum
Assets under Management (AUM) as of October 20 2021: Rs. 7095.11 crore
|SBI Small Cap Fund- Direct Plan-Growth||NAV as of October 20 2021: Rs. 116.2545|
5-year annualised returns: 21.89%
Expense ratio: 1.63% pa
AUM as of October 20 2021: Rs. 9711.37 crore
|Kotak Small Cap Fund||NAV as of October 20 2021: Rs. 188.692|
5-year annualised returns: 22.72%
Expense ratio: 0.47% pa
AUM as of October 20 2021: Rs. 5969.44
|Sundaram Small Cap Fund||NAV as of October 20 2021: Rs. 163.1416|
5-year annualised returns: 13.3%
Expense ratio: 2.19% pa
AUM as of October 20 2021: Rs. 1555.2 crore
|Union Small Cap Fund- Direct Growth||NAV as of October 20 2021: Rs. 31.30|
5-year annualised returns: 17.94%
Expense ratio: 1.85% pa
Assets under Management (AUM) as of October 20 2021: Rs. 563.54 crore
|IDBI Small Cap Fund- Direct Growth||NAV as of October 20 2021: Rs. 17.42|
3-year annualised returns: 20.84%
Expense ratio: 1.54%AUM as of October 20 2021: Rs. 130.37 crore
|Nippon India Small Cap Fund||NAV as of October 20 2021: Rs. 85.4057|
5-year annualised returns: 22.23%
Expense ratio: 0.86%AUM as of October 20 2021: Rs. 17282 crore
|ICICI Prudential Small Cap Fund Direct Plan- Growth||NAV as of October 20 2021: Rs. 55.93|
5-year annualised returns: 18.96%
Expense ratio: 0.64% paAUM as of October 20 2021: Rs. 3187.29 crore
|Edelweiss Small Cap Fund- Direct Growth||NAV as of October 20 2021: Rs. 25.625|
1-year annualised returns: 100.29%
Expense ratio: 0.58%AUM as of October 20 2021: Rs. 1055 crore
|Canara Robeco Small Cap Fund- Direct Plan- Growth||NAV as of October 20 2021: Rs. 24.36|
1-year annualised returns: 106.62%
Expense ratio: 0.47%AUM as of October 20 2021: Rs. 1621.6 crore
If you are new to investing, you can start investing in large-cap or Navi Nifty 50 Index funds. The Nifty 50 index fund tracks the market index of the top 50 companies to fetch you returns on your investments. You can start investing with Rs. 500, enjoy the lowest expense ratio and expect better returns in the long run.
*Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
Consider the risk factor
Small-cap funds have the potential to offer more than 100% returns in a day. However, there are risks associated with such funds. The Net Asset Value of a small-cap fund is hyper-responsive to the movements of its underlying benchmark. So, if the market conditions aren’t good, these funds can incur losses.
Small-cap funds offer better returns in the long run. Hence, it’s good to have a long-term investment window, preferably 8-10 years, while investing in such funds.
Check expense ratio
Actively managed funds come with an expense ratio. It’s a fee that goes to the fund manager. Since the expense ratio takes a portion of your investments away, it’s advised that you go for a fund with a lower expense ratio.
Investors with a high-risk appetite
Small-cap equity funds can be very risky investments, however, they can also provide the best returns. These stocks suffer the most during a sharp fall in the stock market and are subject to high volatility. As a result, only investors able to take high risks may consider these investments.
Those who are looking for large rewards
These mutual funds have the potential to offer superior returns over a long period compared to other types of equity funds. This is because companies with low market cap have a large potential to grow over time. Accordingly, there’s ample room for the company’s stock price to increase.
Individuals seeking long-term growth
Sharp falls and prolonged periods of volatility are common for small-cap funds. As such, these are unsuitable for investors who have a low-risk appetite. However, patient investors who are willing to hold onto their investments for a long time (say 7 years or more) can get unmatched returns.
Risk vs Returns
The NAV (Net Asset Value) of small-cap funds is highly sensitive to market sentiments. When the market conditions are unfavourable, small-cap funds can suffer a lot as they are not established businesses. However, they are an excellent option for patient and aggressive investors.
Fund houses charge a certain fee annually, known as the expense ratio, to manage the fund. The lower this amount, the higher returns you will get when you redeem your units. Hence, look out for the expense ratio while shortlisting mutual funds.
When the market becomes bearish, it can take a few years for the economy to recover. As small-cap stocks are highly sensitive to market conditions. It is better to have a long term investment horizon to have enough time to generate substantial returns.
Diversification of Portfolio
Small-cap funds invest in stocks across various sectors. This allows portfolio diversification. You should make sure to compare the sectoral diversification of various small-cap mutual funds before investing in any scheme.
Experience of the Fund Manager
Fund managers of small-cap funds buy and sell the underlying securities based on thorough research and specialized skills. Thus, the performance of a scheme directly depends on their competence. Hence, it is vital to consider the experience and track record of the fund manager before investing in small-cap mutual funds.
Small-cap funds are treated as equity funds. Hence, they are taxed as equity funds. The dividends earned from small-cap funds are added to your total income and taxed as per the tax slab. If you sell your fund units within one year, a tax of 15% is levied as per the short-term capital gains tax norms. On the other hand, if you sell your fund units after 1 year, you are eligible for a tax exemption up to Rs. 1 lakh. Any earning beyond Rs. 1 lakh is taxed at 10% as per the long-term capital gains tax norms.
Also Read: Advantages And Disadvantages Of Mutual Funds
Small-cap funds have the potential to generate higher returns. However, before investing, you should assess the risk involved. One of the ways to go about it is to diversify your investments in small- and large-cap funds. That way, you can have a balanced investment portfolio, which may help you to mitigate losses during market fluctuations.
Ans: Depending on the holding period, short-term capital gains (STCG) tax of 15% or long-term capital gains (LTCG) tax of 10% is applicable on the realised returns. Nevertheless, note that LTCG of up to Rs. 1 lakh is tax-free.
Ans: This is because these funds invest in companies with small market capitalisation, which can be negatively affected by price fluctuations in the stock market. Hence, these funds are a risky bet. That said, in comparison to other mutual funds, these schemes have the potential to generate higher returns.
Ans: You can pick a small-cap fund that invests that offers high sectoral diversification. Also, you can look at other factors like past performance, the experience of the fund manager, and more.
Ans: Small-cap funds can offer higher returns than other equity-oriented mutual fund schemes. That said the rate of return depends on various factors, such as the market scenario, the experience of the fund manager, etc.
Ans: A common rule of thumb for stock investments is that you need to have a long investment horizon owing to the market fluctuations.
Before you go…
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Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.