Every term a small cap investor needs to know — explained simply, without jargon. 30 plus terms across returns, risk, tax and fund mechanics. Updated July 2026.
Small cap mutual fund investing comes with its own vocabulary. This glossary covers every term you will encounter — from how NAV and CAGR work, to how risk ratios like Sharpe and Sortino are calculated, to how LTCG and STCG tax applies to your gains.
All definitions are written in plain language with no jargon. Tax figures are updated as of July 2026. Use the search box or alphabet links above to jump to any term.
What are the most important terms to know before investing in small cap funds?
The most important terms are NAV (what you pay per unit), CAGR (how returns are measured), Sharpe Ratio (risk-adjusted performance), Drawdown (how much a fund can fall) and LTCG (how your gains are taxed). All of these are defined below with practical examples.
A
Returns
Alpha
The extra return a fund generates above its benchmark index. A positive Alpha means the fund manager added value beyond what the index gave. What makes an actively managed fund worth its cost. Compare Alpha across funds
Fund Mechanics
AUM — Assets Under Management
The total amount of money a mutual fund currently manages on behalf of all its investors. Very large AUM (Rs 50,000 plus Cr) can limit a small cap fund ability to take meaningful positions in truly small companies. See AUM of all funds
B
Risk
Beta
Measures how much a fund moves relative to its benchmark. A Beta of 1.2 means the fund rises or falls 20% more than the benchmark. Higher Beta equals higher volatility. Small cap funds typically have Beta above 1.
Returns
Benchmark
The index a fund measures its performance against. For small cap funds, common benchmarks are Nifty Smallcap 250 or BSE Small Cap Index. A fund that consistently beats its benchmark over 5 to 10 years is adding real value.
C
Returns
CAGR — Compound Annual Growth Rate
The annualised return of an investment over a period assuming profits are reinvested. If Rs 1 lakh grew to Rs 2.59 lakh in 10 years, the CAGR is 10%. Used to compare returns across different time periods. See historical small cap CAGR
Basics
Corpus
The total value of your investment at any given point. For example — I want to build a corpus of Rs 1 crore for retirement. The corpus grows as your investment earns returns and you keep investing.
D
Risk
Drawdown
The peak-to-trough fall in a fund value during a market correction. A fund that fell from Rs 100 NAV to Rs 60 NAV experienced a 40% drawdown. Lower maximum drawdown indicates better risk management. Learn about small cap drawdowns
Fund Mechanics
Direct Plan
A mutual fund plan where you invest directly with the fund house, cutting out the distributor. Has a lower expense ratio (0.5 to 1% less than Regular plan) since no commission is paid. Over 20 years this difference can be worth lakhs. Best for self-directed investors.
E
Costs
Expense Ratio
The annual fee charged by the fund house as a percentage of your total invested amount. Deducted daily from NAV — you never pay it directly. Direct plans have expense ratios of 0.3 to 0.8%. Regular plans 0.8 to 1.8%. Lower is always better.
Costs
Exit Load
A fee charged when you redeem your investment before a certain period — typically 1% if you sell within 1 year. After 1 year, most small cap funds charge no exit load. Designed to discourage short-term trading.
F
Basics
Folio Number
A unique account number assigned to you by a mutual fund house when you invest. Similar to a bank account number. If you invest in 3 different funds from the same AMC, you may have 1 folio covering all 3 investments.
How are risk ratios like Sharpe and Sortino used to compare small cap funds?
Risk ratios measure how much return a fund delivers per unit of risk taken. Sharpe Ratio uses total volatility; Sortino only counts downside moves. For small cap funds where upside spikes are welcome, Sortino is often the more useful number. Both are available on the MFD Returns tool.
I
Fund Mechanics
IDCW (formerly Dividend)
Income Distribution cum Capital Withdrawal. The fund periodically pays out a portion of profits to investors. Unlike bank dividends, mutual fund IDCW payouts reduce the NAV by the same amount. For long-term small cap investing, the Growth option is almost always better as IDCW is taxed as income.
L
Tax
LTCG — Long Term Capital Gains
Profit from equity mutual fund units held for more than 1 year. In 2026, LTCG up to Rs 1.25 lakh per year is tax-free. Above Rs 1.25 lakh, 12.5% tax applies without indexation. Read the full tax guide
Risk
Liquidity Risk
The risk that a fund cannot sell its holdings quickly without moving the price significantly. Small cap stocks are less liquid than large cap — during market crashes, small cap funds may struggle to sell stocks at fair prices, amplifying losses.
M
Basics
Market Capitalisation
Share price multiplied by total shares outstanding. Determines if a company is classified as small, mid or large cap by SEBI. Companies ranked 251st and below by market cap are classified as small cap. Updated twice yearly by AMFI.
Fund Mechanics
MFD — Mutual Fund Distributor
A SEBI registered professional who helps you invest in mutual funds and provides ongoing portfolio guidance. MFDs earn a commission from the fund house included in the Regular plan expense ratio. A good MFD actively reviews and rebalances your portfolio. MFD fund returns tool
N
Basics
NAV — Net Asset Value
The daily price per unit of a mutual fund scheme. Calculated as total assets minus liabilities divided by total units. When you invest Rs 5,000 in a fund with NAV of Rs 50, you get 100 units. NAV is declared once a day after market close. See live NAV of all funds
R
Returns
Rolling Returns
Returns calculated across all possible overlapping time periods rather than one fixed start and end point. Far more accurate than point-to-point returns. A fund with high average rolling returns over 7 years is consistently strong — not just lucky in one period. See rolling returns
Fund Mechanics
Regular Plan
A mutual fund plan where you invest through a SEBI registered Mutual Fund Distributor. Has a higher expense ratio than Direct plan because it includes distributor commission. Worth choosing if your MFD actively manages and rebalances your portfolio.
SIP
Rupee Cost Averaging
The benefit of investing a fixed amount regularly through SIP. When markets fall, your fixed amount buys more units. When markets rise, it buys fewer. Over time this averages out your purchase cost, reducing the impact of market volatility. Learn SIP strategy
S
Basics
Small Cap
Companies ranked 251st and beyond by market capitalisation as defined by SEBI. These are relatively small businesses — often less well-known, with higher growth potential but also higher risk compared to mid and large cap companies. Learn more
SIP
SIP — Systematic Investment Plan
A method of investing a fixed amount in a mutual fund at regular intervals (usually monthly). The auto-debit happens on a chosen date. SIP builds discipline, benefits from rupee cost averaging and is ideal for small cap high volatility. SIP strategy guide
Tax
STCG — Short Term Capital Gains
Profit from equity mutual fund units held for less than 1 year. Taxed at 20% on the full gain with no exemption. Much higher than LTCG — a strong reason to hold small cap investments for at least 1 year before redeeming. Full tax guide
Risk
Sharpe Ratio
Return earned per unit of risk taken. A Sharpe Ratio of 1.5 means the fund delivered 1.5 units of return for every unit of risk. Higher is better when comparing funds in the same category. Compare Sharpe Ratios
Risk
Sortino Ratio
Similar to Sharpe Ratio but only penalises downside volatility — not upside. A fund that goes up sharply and down mildly will have a higher Sortino than Sharpe. More relevant for small cap funds where upside spikes are desirable. Compare Sortino Ratios
SIP
Step-Up SIP
A SIP that automatically increases your monthly investment by a fixed percentage each year — typically 5 to 15%. Designed to grow your investment in line with salary increases. The compounding impact of a step-up SIP over 15 plus years can be 2 to 3x vs a flat SIP. See Step-Up SIP calculations
SIP
STP — Systematic Transfer Plan
A strategy to invest a lumpsum safely into volatile funds. Park the money in a liquid fund, then set up an STP to transfer a fixed amount each month into the small cap fund. Gets the benefit of rupee cost averaging for lumpsum investments.
T
Tax
Tax Harvesting
Redeeming mutual fund units with LTCG gains up to Rs 1.25 lakh each financial year to use the tax-free exemption, then reinvesting immediately. Completely legal. Resets your cost basis higher annually, reducing the taxable gain in future years. How to do tax harvesting
V
Risk
Volatility
How much a fund NAV fluctuates over time. High volatility means large swings up and down. Small cap funds are among the most volatile in the mutual fund universe — they can fall 40 to 50% quickly but also rise 60 to 80% in recovery. Long investment horizon is essential.
X
Returns
XIRR
Extended Internal Rate of Return — the most accurate way to measure returns on SIP investments where money is invested at different times and in different amounts. More accurate than simple CAGR for regular investments. Most portfolio tracking apps calculate XIRR automatically.