- Small cap funds invest in companies ranked 251st and below by market cap as per SEBI
- Historical 10-year CAGR of top small cap funds is 20 to 22% — higher than large cap at 13%
- They can fall 40 to 60% during market crashes — patience and a 10-year horizon are essential
- There are 35 active small cap funds in India as of July 2026
- SIP is the best way to invest — start with as little as Rs 500 per month
- Always choose Direct Plan to save 0.5 to 1% annually in expense ratio
What exactly is a small cap mutual fund?
A small cap mutual fund is a SEBI-regulated investment scheme that invests at least 65% of its assets in companies ranked 251st and below by market capitalisation. These are smaller, often lesser-known businesses — typically with a market cap below Rs 5,000 crore.
The term small cap does not mean small quality. Many of India biggest companies today — Titan, Bajaj Finance, Page Industries — were once small cap stocks. Small cap funds bet on finding tomorrow winners among today smaller businesses.
How does a small cap mutual fund work?
When you invest in a small cap mutual fund, your money is pooled with thousands of other investors. A professional fund manager uses this pool to buy shares of 50 to 150 small companies across different sectors.
- 1You invest — Rs 500 via SIP or Rs 5,000 lumpsum. You get units based on the current NAV (Net Asset Value).
- 2Fund manager deploys capital — Buys shares of carefully researched small companies with growth potential.
- 3NAV moves daily — As the underlying stocks rise or fall, the NAV of your fund moves accordingly.
- 4You profit on redemption — When you sell your units at a higher NAV than your purchase NAV, you make a gain. Tax depends on holding period.
What returns have small cap mutual funds delivered historically?
Small cap funds have consistently outperformed large cap funds and fixed deposits over long time periods. The data below shows category averages — top-performing funds have done significantly better.
| Time Period | Small Cap Avg CAGR | Mid Cap Avg CAGR | Large Cap Avg CAGR | Fixed Deposit |
|---|---|---|---|---|
| 3 Years | 22 to 32% | 18 to 26% | 13 to 18% | 6 to 7% |
| 5 Years | 20 to 28% | 16 to 22% | 12 to 16% | 6 to 7% |
| 10 Years | Approx 22% CAGR | Approx 18% CAGR | Approx 13% CAGR | Approx 7% |
| Worst 1-Year Drop | -55 to -65% | -40 to -50% | -30 to -38% | Never negative |
What are the real risks of investing in small cap funds?
Small cap funds are among the highest-risk category in mutual funds. Before investing, you must understand all the risks clearly — not just in theory but in rupee terms.
| Risk Type | What It Means | Real Impact |
|---|---|---|
| Volatility Risk | NAV swings sharply up and down | Rs 10 lakhs can become Rs 4 lakhs temporarily |
| Liquidity Risk | Small stocks are harder to sell quickly | Fund may struggle to exit positions during a crash |
| Business Risk | Small companies can fail or stagnate | Individual stocks in the portfolio can go to zero |
| Behavioural Risk | Panic selling at the bottom | The biggest risk — locking in losses permanently |
| Concentration Risk | Fund may be heavy in one sector | Sector crash hurts the fund disproportionately |
Who should invest in small cap mutual funds?
You have a minimum 7 to 10 year investment horizon, you already have a large cap and mid cap foundation, you can genuinely watch your portfolio fall 50% without panic selling, and you are looking for maximum wealth creation over the very long term.
You need the money in less than 5 years, you are a first-time equity investor, you have not built an emergency fund, or the thought of your investment halving temporarily causes anxiety that would lead you to sell.
| Investor Type | Small Cap Suitable? | Suggested Allocation |
|---|---|---|
| First-time investor | No | Start with large cap or index fund |
| 3 to 5 year horizon | No | Mid cap maximum, no small cap |
| 7 to 10 year, moderate risk | Partial | 10 to 15% of equity portfolio |
| 10 plus year, high risk appetite | Yes | 20 to 30% of equity portfolio |
| Near retirement (5 years) | Exit | Gradually reduce to zero |
How many small cap mutual funds are there in India?
As of July 2026, there are 35 active small cap mutual funds in India. SEBI rules allow each fund house to run only one small cap fund — so there are 35 different fund houses offering small cap funds.
Not all 35 are equally good. The top 5 to 7 funds have consistently strong 10-year track records. The rest vary significantly in quality of stock selection and risk management.
How to Compare All 35 Funds
CRN India tracks all 35 active small cap regular plan funds with 1D, 1Y, 3Y and 5Y returns, AAUM, Sharpe Ratio, Sortino Ratio and Standard Deviation — all in one sortable table. View All 35 Small Cap FundsWhat is the difference between Direct and Regular plan in small cap funds?
Every small cap fund is available in two variants — Direct Plan and Regular Plan. The only difference is the expense ratio.
| Feature | Direct Plan | Regular Plan |
|---|---|---|
| Expense Ratio | 0.3 to 0.8% per year | 0.8 to 1.8% per year |
| Distributor Commission | None | 0.5 to 1% included |
| NAV | Higher (grows faster) | Lower |
| Best For | Self-directed investors | Investors with active MFD advisor |
| Long-term Impact (20 yrs) | Rs 10 to 25 lakhs more corpus | Lower final corpus |
How do you start investing in a small cap mutual fund?
- 1Complete KYC — One-time process using PAN and Aadhaar. Do this on Kuvera or MF Central — both are free and SEBI registered.
- 2Choose a fund — Look for consistent 10-year rolling returns, experienced fund manager (5 plus years in charge), reasonable AUM (Rs 8,000 to 25,000 Cr sweet spot) and low expense ratio.
- 3Select Direct Plan — Growth option — Never Regular for self-directed investors. Always Growth over IDCW for long-term wealth creation.
- 4Start a SIP — Even Rs 500 per month is a good start. Pick a date right after your salary credit. Set up auto-debit and forget about it.
- 5Review annually — Check your fund once a year against its benchmark and category peers. Do not react to short-term market moves.
Should you invest via SIP or lumpsum in small cap funds?
For most investors, SIP is strongly preferred for small cap funds. Here is why:
- ✓Small cap NAVs are highly volatile — timing a lumpsum entry is extremely difficult even for professionals
- ✓SIP removes timing risk by spreading purchases over months and years
- ✓Rupee cost averaging means you buy more units when prices fall — exactly when beginners panic and stop investing
- ✓If you have a large lumpsum, use an STP — park it in a liquid fund and transfer monthly to the small cap fund