Best Small Cap Funds In India

Unlocking the potential for significant growth and capturing opportunities in lesser-known gems of the stock market, small-cap mutual funds have become a sought-after investment avenue for those seeking high returns. These funds provide investors with exposure to promising companies with smaller market capitalisation that have the potential to outperform the broader market. In this blog, we will explore some of the best small cap funds in India that have consistently delivered impressive results, offering investors the chance to participate in the growth story of promising small-cap companies.

What are small cap funds

Small-cap mutual funds in India are a type of mutual fund that primarily invests in stocks of small-cap companies. Small-cap companies are those with relatively smaller market capitalisation, often considered to be outside the top 250 or 300 companies in terms of market value.

These funds aim to generate capital appreciation by investing in smaller companies with high growth potential. Small-cap mutual funds are known for their higher risk and volatility compared to large-cap or mid-cap funds, but they also have the potential for higher returns.

Investors looking for long-term growth and willing to take on higher risk often consider small-cap mutual funds as a part of their investment portfolio.

As per SEBI guideline, Mutual Fund can be categorised as Small Cap Fund provided at least 65% investment in small cap Firms. Small cap firms – Firms ranked below 250 by full market capitalisation.

How long should I stay invested in Best Small Cap Funds?

Small cap funds generally go through long patch of low returns and reward investors in sudden span for a specific year or two. So people with patience are right candidate for small cap funds. Ideally one should have a investment period of 7 years or more for Small Cap Mutual funds. Minimum being 5 years.

Tax on Small Cap Funds

Small cap funds are subject to the same tax rules as other equity funds, as per the new Finance Bill 2023. Here are the key tax provisions:

  1. Short-term profits: If you make profits by selling your investment within a year, they are taxed at a flat rate of 15%, regardless of your applicable income tax slab rate.
  2. Long-term returns: For returns exceeding Rs. 1 lakh made after holding the investment for more than 12 months, a flat tax rate of 10% is applicable.

It’s important to note that these tax rates are subject to any changes in tax regulations from time to time. It’s always advisable to consult with a tax advisor or financial expert for personalised advice regarding taxation on your investments.

Advantages of Small Cap Mutual Funds

nvesting in small-cap mutual funds in India can offer several advantages. Here are some of the key advantages:

  1. Growth Potential: Small-cap companies have the potential for rapid growth as they are in their early stages of development. Investing in small-cap mutual funds allows investors to participate in the growth story of these companies, which can potentially lead to higher returns.
  2. Lesser Institutional Ownership: Small-cap stocks are often less widely covered and owned by institutional investors compared to large-cap stocks. This can create opportunities for active fund managers to identify undervalued companies and generate alpha through their research and stock-picking expertise.
  3. Market Inefficiencies: The small-cap segment of the market tends to be less efficient and less followed by analysts. This can result in pricing inefficiencies, providing opportunities for skilled fund managers to uncover hidden gems and benefit from mispriced stocks.
  4. Portfolio Diversification: Adding small-cap mutual funds to an investment portfolio can enhance diversification. Small-cap stocks have a lower correlation with large-cap stocks, which means they may perform differently in various market conditions. This diversification can help reduce overall portfolio risk.
  5. Long-Term Wealth Creation: Small-cap companies have the potential to become large-cap companies over time. By investing in small-cap mutual funds for the long term, investors can benefit from the compounding effect and potentially create significant wealth over time.

Which are best small cap funds to invest?

Attracted by returns of small cap funds in 2020 & 2021, investors are keen to start SIPs in a good small cap fund. Let us evaluate some strong contenders in small cap mutual fund category.

  • Quant Small Cap Mutual Fund
  • Kotak Small Cap Mutual Fund
  • Axis Small Cap Mutual Fund
  • Nippon India Small Cap Mutual Fund
  • SBI Small Cap Mutual Fund

Let us see these Small Cap Mutual Funds one by one.

Quant Small Cap Fund Review

The fund has demonstrated strong performance in both bullish and bearish market conditions, showcasing the fund manager’s exceptional stock-picking skills. However, it’s important to note that the fund has a relatively short track record of outperformance, with notable success observed primarily from 2020 onwards.

However we should note that this fund was not with current management till couple of years back. So current team is not responsible for earlier poor performance. New team has shown lot of promise and is definitely a strong contender.

Arvind Pande, the fund manager of Quant Small Cap, adopts a style-agnostic approach when selecting businesses. He utilizes Quant’s proprietary VLRT model, which assesses stocks based on four key factors: valuation, liquidity, risk, and timing.

Pande’s investment strategy involves actively managing the portfolio and frequently making adjustments. This approach is consistent across most of the schemes he manages. As a result, some of his top holdings may only remain in the portfolio for a few months before being replaced with new opportunities.

With modest AUM, highest volatility among peers and short historical records, it may be prudent to start with a small allocation and gradually increase it over time keeping a watch.

Kotak Small Cap Fund Review

A long timer in Small cap category. Probably fund with maximum number of stocks (almost 80) in small cap category. Tends to take exposure more towards larger small cap compared to peers. This should help it during downside. Good 2021 performance and if that is important criteria for you, this is safer bet over Quant Small Cap Fund.

It terms of volatility, it neither on top or bottom. Ranks somewhere in middle. Its long term returns are also somewhere in middle of category.

Axis Small Cap Fund Review

Launched in 2013, it has been among top small cap funds from long term record. Strong growth oriented investment strategy has helped fund perform well.

From Volatility perspective, it shown lowest volatility among peers. Even beating long timer SBI Small cap Fund by a slender margin. So if you want fund that is least fluctuating among the category, this could be one for you.

Generally invests in larger bucket of stocks (60 plus).

Nippon India Small Cap Fund Review

Another long timer from stable of former Reliance Mutual Fund. Good long term rolling returns compared to many of peers.

Too much diversification in terms of number of stocks. At times goes beyond 125 stocks in portfolio. Bit strange and defensive strategy.

A growth oriented investment strategy with tendency of moving towards mid-cap capitalisation.

Long term rolling returns match to that of Axis small cap fund.

SBI Small Cap Fund Review

A start small cap fund for a while. Did not perform well in 2021. Fund gave around 46% returns in this year. If you look at 46%,it looks great returns as a standalone number. However in comparison to its peers, it is at bottom. Almost half returns of Quant Small Cap Fund.

But we need a fund not for a year or two. Especially small caps are meant to be held for very long period for real power of compounding. SBI small cap fund has a fantastic record. Hardly any other small cap comes close to it.

Fund applies growth strategy but generally stocks are less than 50. I think that helps it get better returns when call comes right.

How Best Small Cap Funds compare with each other

Let\’s do some object comparison on risk stats to reduce personal bias while choosing winner among Best Small Cap Mutual Funds.

Which is highest Performing Small Cap Fund

SBI Small cap stands out with 5 years rolling returns averaging 18% percent. Nippon small cap fund and Axis small cap fund coming distant second with 15.4% and 14.9% returns. SBI small cap fund also tops returns of more than 20% for almost 45% of time and no negative returns if you hold fund for 5 years whenever you invest in it.

Which is the lowest Volatility Small Cap Fund?

Axis small cap fund has shown least volatility of 23.19 with SBI small cap fund coming very close second at 23.79. Quant small cap fund is most volatile(32.22) not just in this comparison but in overall category. Nippon India small cap fund Kotak Small cap fund sit among middle.

So if you don\’t appreciate lot of ups and downs or fluctuations in price, Axis Small Cap Fund and SBI Small Cap Fund are better choices.

Risk adjusted returns / Sharpe & Sortino Ratio

For Sharpe ratio Axis Small Cap Fund tops(1.17) followed by Kotak Small Cap (1.10) and SBI Small Cap(1.01).

Sortino ration which is risk adjusted returns considering negative deviation however brings a surprise. Quant small cap fund (1.36) tops followed by Kotak Small Cap Fund(1.12) and SBI Small cap fund(1.11).

Certainly Quant Small cap fund is now worth keeping under watch. But Kotak Small Cap Fund and SBI Small Cap Fund look more consistent lot for now.


Alpha tells us how fund is beating its benchmark. In simple terms it shows Fund Manager skills in getting extra compared to general market returns.

SBI Small Cap Fund () and Nippon India Small Cap Fund() are trailing in race here.


Turnover tell us conviction of fund manager in selecting stocks. Lower turnover indicates fund manager hold stocks for long time and does not keep shuffling them.

Kotak Small Cap Fund (11%) shows best conviction followed by Axis small Cap fund(21%) and SBI small cap fund(28%).

So buy right and sit tight believers can look at Kotak Small Cap Fund more seriously.


Looking at consistency in returns and how each fund stood in various risk parameters, if I have to chose a Small Cap Fund, I would consider among SBI Small Cap Fund, Kotak Small Cap Fund and Axis small cap fund. These funds shown consistency across various parameters to be evaluated.

Small cap fund being most volatile among equity funds, Standard deviation is critical evolution parameter for this category. So I would narrow down selection between Axis Small Cap Fund and SBI Small Cap Fund.

I think we will not go wrong with either of them. But giving due credit to long history of performance, I would chose SBI Small Cap Fund over Axis Small Cap Fund.

Another rare thing I have seen with SBI Small Cap Fund is it at times stops taking new investments when it finds opportunities are less to invest in small cap companies. This helps protect interest of existing investors.

You can check Lump sum plus SIP calculator to see how much you can get in long term with such fabulous returns.

So SBI Small Cap Fund is my pick among Best Small Cap Mutual Funds. What is yours? Do let me know in comments with your choice and reason.

Common FAQs

How to invest in Small Cap Funds online?

You can use platforms that help invest in direct plans and start SIP or do lumpsum investment as per market conditions. You can read which is my favourite app to invest in direct plan mutual fund.

Do Small Cap Funds Pay dividend?

Yes. SmallCap Funds pay dividend but from taxation perspective, it is generally better to invest in growth plan and do a systematic withdrawal (SWP) from mutual funds.

How to choose Best Small Cap Fund?

Do check out past performance over long period, check risk parameters and especially Volatility of fund. Monitor any change in Fund Manager as that would impact stock selection.

What are the risks involved in investing in small cap funds?

Besides normal risks involved in any Equity Mutual Fund, Small cap funds suffer from additional risk and volatility as they invest in relatively small size companies. History shows these fund perform poorly in bear phase as money flows towards more stable and large companies in bad periods.

What is the lock in period for small cap mutual funds?

There is no lock in period for small cap mutual funds. You can withdraw money at any time subject to some exit load like 1% if withdrawn within a year from investing. This is common to all Equity Mutual Funds.

Who should invest in small cap funds? Who should avoid them?

Although any investor can invest in Small Cap Funds, exposure or percentage of your overall portfolio will vary as per risk profile. Due to high volatility, conservative investor should have low allocation and aggressive ones may have high allocation. Due to nature of these funds, time horizon of investment should be larger. Ideally 7 years plus. A Know Nothing Investor may choose a flexi cap fund instead and let fund manager decide where to invest.

Also check out Best Mutual Funds in India in other categories.

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