Small-Cap Mutual Funds: Meaning, Features, Benefits, Factors to Consider

Published on March 18, 2026 | 3 min read

A small-cap mutual fund is a type of mutual fund that invests in small-cap stocks, which have a market capitalisation below ₹5000 crore. These funds are known for higher growth potential compared to large-cap funds.

Small-cap funds are an ideal choice for aggressive investors who are comfortable with taking high risk for high reward.

Key Takeaways:

Small-cap mutual funds invest 65% of their assets in small-cap stocks, and the remaining is in large-cap, mid-cap or debt instruments.
These funds invest in companies with market capitalisation below ₹5000 crore.
The fund managers follow a bottom-up stock selection approach.
These funds are suitable for investors with a high risk appetite and high volatility tolerance.

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What are Small-Cap Mutual Funds?

Small-cap mutual funds are open- ended equity funds that are mandated to invest at least 65% of their assets in small-cap companies. The remaining 35% is to be invested in large-cap, mid-cap or debt instruments.

These funds typically invest in companies which are included in the small-cap index and ranked below 250 on the NSE/BSE exchanges.

Small-cap mutual funds are risky investments due to their volatility and uncertainty in the business of small companies. Investors who are looking for high-growth potential and have a high-risk-bearing capacity usually invest in small-cap funds.

Features of Small-Cap Mutual Funds

Small-cap mutual funds are different from large-cap and mid-cap funds due to the following features:

Bottom-Up Stock Selection Approach

These funds usually follow a bottom-up approach for stock selection, focusing on scalable businesses with strong management and sustainable competitive advantage.

Investment in Small-Cap Stocks

Small-Cap Mutual funds invest the majority of their funds in small-cap companies with a market capitalisation below ₹5000 crore.

High Growth Potential

These funds invest in companies with high growth potential, aiming to outperform the broader market indices.

Higher Risk-Reward

Small-cap funds are risky because their portfolio consists of small-cap stocks, which are volatile in nature. However, if the small-cap stocks perform well, they can generate higher returns compared to large or mid-cap funds.

Liquidity

These funds invest in low-liquidity stocks, which makes it difficult to buy and sell shares quickly without much fluctuation in the stock price.

Diversification

To manage the risk, these funds invest in a diversified portfolio of small-cap stocks across various sectors.

Top Small-Cap Funds To Invest in 2026

Here is the list of top-performing small-cap mutual funds based on 5-year CAGR.

Name	AUM (Cr)	3Y CAGR	5Y CAGR
Quant Small Cap Fund	27,653.65	19.30%	24.30%
Bandhan Small Cap Fund	20,474.12	29.37%	22.98%
Nippon India Small Cap Fund	67,641.50	20.08%	22.10%
Invesco India Smallcap Fund	9,716.40	23.81%	21.55%
Bank of India Small Cap Fund	1,903.70	19.31%	19.62%
HDFC Small Cap Fund	37,423.94	17.00%	19.61%
HSBC Small Cap Fund	15,374.92	15.52%	19.60%
Canara Rob Small Cap Fund	12,768.62	15.48%	19.43%
Edelweiss Small Cap Fund	5,480.80	19.26%	19.32%
DSP Small Cap Fund	16,885.54	19.29%	19.07%

Data as of 18 March 2026
Source: Tickertape

Benefits of Investing in Small-Cap Mutual Funds

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

Higher Return

Small-cap mutual funds invest in companies that have high growth potential. If the overall market performs well, small-cap stocks can generate higher returns compared to large-cap or mid-cap stocks.

Multi-bagger stocks

These funds can pick multi-bagger stocks, which can generate extraordinary returns.

Diversification

These funds provide exposure to diverse and unique sectors that are not dominated by large-caps, helping to spread risk and reduce reliance on large-cap stocks

Factors to Consider Before Investing in Small-Cap Mutual Funds

Before investing in small-cap mutual funds, you need to consider the following factors:

Check Historical Performance

Check how that particular small-cap fund has performed well in the last 3 to 5 years.

Check Portfolio

Check which stocks already exist in the portfolio. It helps to give an idea about how the investment strategy is followed by the fund manager.

Fund Manager Experience

Check the experience of the fund manager and how many schemes are being managed.

Expense Ratio

It is the fee charged by the company for managing your fund. If the return is less than 1%, then it is considered a favourable fund for investment; however, a fee above 1% is considered expensive and may impact the portfolio return.

Who Should Consider Investing in Small-Cap Mutual Funds?

Small-cap mutual funds are considered risky investments and are only suited for a specific type of investor:

Long-term Investors

Investors looking to invest for a long-term horizon of 7 years or more can benefit from small-cap investments. Over a long-term period, emerging businesses had more growth potential than well-established large-cap companies.

Diversification Seeker

Investors seeking exposure in various emerging industries or sectors can look to invest in it.

High Risk Tolerance

These funds are volatile and carry high risk. Investors who are comfortable with taking high risk on their investments can go with small-cap funds.

Small-cap stocks tend to be more volatile than their large-cap counterparts but offer greater potential returns. While they may not provide as much stability as larger companies, they can still be suitable investments if you know where to look and how to invest wisely in them.

About Author

Subhasish Mandal

Sub-Editor

Finance professional with strong expertise in stock market and personal finance writing, he excels at breaking down complex financial concepts into simple, actionable insights. Holding a Master’s degree in Commerce, he combines academic depth with practical knowledge of technical analysis and derivatives.