Ruchi SrivastavaWealth creation is the dream of each and every individual all over the world for a safe and secure future. Small-cap mutual funds can be a lucrative choice for investors ready to take on higher risks in pursuit of greater returns. As 2025 begins, it could be the ideal moment to evaluate the best small-cap mutual funds for your portfolio.
Indian stock markets are on the rise, and experts suggest that small-cap mutual funds (MFs) could be good investment options. These funds have often given higher returns than their benchmarks. While they come with higher risks, their strong performance and the current market trend make them worth considering. In this blog, we will take an in-depth look at the top-performing options worth considering.
What are Small cap mutual funds?
Small-cap mutual funds focus on investing in companies with smaller market capitalizations, usually under $5 billion. These funds seek to leverage the growth potential of emerging businesses, which often perform better than larger companies in favorable market conditions. However, they also involve greater risk and volatility.
List of Small cap Mutual Funds for Investment in India
1) Bandhan Small Cap Fund (Direct)- 29.37%
2) ITI Small Cap Fund (Direct)-27.39%
3) Invesco India Smallcap Fund (Direct)- 27.28%
4) Nippon India Small Cap Fund (Direct)- 26.85%
5) Quant Small Cap Fund (Direct)- 26.61%
6) Tata Small Cap Fund (Direct)- 25.77%
7) Franklin India Smaller Companies Fund (Direct)- 25.72%
8) LIC MF Small Cap Fund (Direct)- 25.62%
9) HSBC Small Cap Fund (Direct)-24.74%
10) Edelweiss Small Cap Fund (Direct)- 24.04%
11) Bank of India Small Cap Fund (Direct)- 24.02%
12) HDFC Small Cap Fund (Direct)-23.49%
13) DSP Small Cap Fund (Direct)- 22.21%
14) BSE 250 Small Cap Total Return Index- 22.03% return
15) NIFTY Small cap 250 Total Return Index- 22.65%
According to data from the AMFI website dated January 3, 2025, these 15 small-cap funds have outperformed by delivering alpha returns over the past three years. These funds outperformed the benchmarks of the BSE 250 SmallCap Total Return Index (22.03%) and the NIFTY SmallCap 250 Total Return Index (22.65%). Although past performance cannot guarantee future outcomes, these mutual funds demonstrate strong track records. Pankaj Mathpal, founder and CEO of Optima Money Managers, has identified the top five small-cap mutual funds that investors should consider in 2025 for wealth creation.
Top Small-Cap Mutual Funds Recommended by Pankaj Mathpal
- Motilal Oswal Small Cap
- Bandhan Small Cap
- Tata Small Cap
- HSBC Small Cap
- Mahindra Manulife Small Cap
Key Considerations Before Investing in Small-Cap Mutual Funds
When investing in small-cap mutual funds, it’s essential to keep the following factors in mind:
- Risk and Volatility: Small-cap mutual funds are more volatile compared to mid-cap or large-cap funds. Their net asset values (NAVs) tend to experience significant fluctuations, making them high-risk investments.
- Investor Knowledge: Success in small-cap funds often requires a good strategy and keen observation. Due to their high volatility, these funds are better suited for experienced investors who are familiar with mutual fund investments.
- Investment Horizon: Small-cap mutual funds are ideal for long-term investors. They may not be suitable for those looking for short-term gains.
- Market Conditions: Small-cap funds tend to perform well during favorable market phases, making timing a crucial consideration. Evaluating current market trends can help you make better investment choices.
- Diversification: Adding small-cap funds to a diversified portfolio can help manage risk. However, it’s essential to avoid excessive allocation to these funds to safeguard against potential market downturns.
- Expense Ratios: High expense ratios can reduce your overall returns. Ensure you review and compare the costs associated with the funds before investing.
- Fund Manager Expertise: The success of small-cap mutual funds often depends on the expertise of the fund manager. Assess their experience and past performance before making your decision.
- Liquidity: Small-cap funds usually invest in companies with limited market liquidity, which may complicate exiting your investment during periods of high market volatility.
Who Should Consider Investing in Small-Cap Mutual Funds?
Before exploring the best small-cap mutual funds for 2025, determine if these funds align with your investment profile:
- Experienced Investors Seeking Diversification: Small-cap funds are ideal for those already familiar with investing and looking to diversify their portfolio. Since these funds carry higher risks, it’s important to ensure your investments are spread across various asset classes and not limited to small-cap funds.
- Investors with High-Risk Appetite: Small-cap funds focus on smaller companies that are still in the growth phase, making them riskier than mid-cap or large-cap funds. They are suitable for investors who are comfortable with the potential for sudden downturns and have the appetite for higher risk.
- Long-Term Investors: These funds are prone to short-term volatility but tend to perform well over a longer time horizon. They are best suited for investors who can remain committed to their investment for an extended period.
Final Thoughts
Investing in small-cap mutual funds can be a great strategy for building wealth if you are aware of the risks and maintain a long-term outlook. It’s essential to choose funds with solid fundamentals, steady performance, and skilled fund managers. Note that the information shared is based on data from the Association of Mutual Funds in India (AMFI) and reflects returns as of January 3, 2024.
Source – Best Mutual Funds: These are the top small-cap MFs to invest in 2025. Do you own any?
