Summary
Penny stock mutual funds invest in companies that are low-priced and have the potential to grow over time.
Investors should compare the funds in terms of expense ratio, AUM, historical returns, and growth potential before investing.
Best 10 Penny Stock Mutual Funds: Quick Comparison
The best penny stock mutual funds in India as of 30 July 2026 are listed below. The mentioned funds are categorised based on their AUM, expense ratio, minimum investment, annual return, and benchmark index.
| Name | Expense Ratio (%) | AUM (In ₹ Crores) | 1 year Returns (%) | Minimum Investment (₹) | Benchmark |
| HDFC Small Cap Fund | 0.75 | 40,416.80 | 2.75 | 100 | BSE 250 Small Cap Index |
| Nippon India Small Cap Fund | 0.70 | 78,407.03 | 6.75 | 100 | Nifty Smallcap 250 TRI |
| Axis Small Cap Fund | 0.77 | 29,393.79 | 4.06 | 100 | Nifty Smallcap 250 TRI |
| Franklin India Smaller Companies Fund | 0.77 | 14,336.42 | 2.03 | 500 | Nifty Smallcap 250 |
| SBI Small Cap Fund | 0.79 | 40,156.66 | 3.71 | 500 | BSE 250 Smallcap |
| Kotak Small Cap Fund | 0.59 | 18,690 | 2.60 | 100 | Nifty Smallcap 250 TRI |
| ICICI Pru Small Cap Fund | 1.51 | 9,378.80 | 0.79 | 100 | Nifty Smallcap 250 TRI |
| UTI Small Cap Fund | 0.87 | 5,213.42 | 4.27 | 500 | Nift Smallcap 250 TRI |
| Bandhan Small Cap Fund | 0.35 | 28,466.18 | 7.95 | 100 | BSE 250 Smallcap TR INR |
| Invesco India Small Cap Fund | 0.42 | 13,384.88 | 13.88 | 100 | BSE 250 Smallcap TR INR |
Top 10 Penny Stock Mutual Funds
Penny stocks represent low-price equity shares issued by emerging companies with small market capitalisation. Penny stock mutual funds invest in penny stocks or low-priced shares of small and emerging businesses that have the potential to grow in the future and thus carry higher risk. The funds aim to diversify their portfolio to reduce concentration risk. However, they involve high volatility risk due to changing market conditions.
- HDFC Small Cap Fund
HDFC Small Cap Fund holds an AUM worth ₹40,416.80 crore with an expense ratio of 0.75%. It recorded an annual return of 2.75%. These funds are known for their disciplined stock selection and emphasis on fundamentally strong companies.
- Nippoon India Small Cap Fund
This fund is one of the largest small-cap funds that allows exposure to emerging businesses. It recorded an annual return of 6.57% while holding an AUM of ₹78,4.7.03 crore, with an expense ratio of 0.70%.
- Axis Small Cap Fund
The Axis small-cap fund has an AUM of ₹29,393.79 crore while holding an expense ratio of 0.77%. It delivered a return of 4.06% in a year. The fund employs a value-oriented investment strategy by generating high income while managing risk.
- Franklin India Smaller Companies Fund
The Franklin India Smaller Companies Fund invests in growth potential small and mid-size companies, selecting from the bottom up. The AUM of this fund is worth ₹14,366.42 crore, charges an expense ratio of 0.77%, and recorded a return of 2.03% in a year.
- SBI Small Cap Fund
The SBI Small Cap Fund has an AUM of ₹40,156.66 crore with an expense ratio of 0.79% and earned an annual return of 3.71%. This fund prioritises high-quality funds with a scalable business model. It recorded a strong performance over time.
- Kotak Small Cap Fund
The LIC MF Small Cap Fund mostly invests in fundamentally strong businesses with growth potential. It has an AUM worth ₹18,690 crore while charging an expense ratio of 0.59%. The fund delivered an annual income of 2.60%.
- ICICI Pru Small Cap Fund
The total AUM of ICICI Pru Small Cap Fund is ₹9,378.80 crore with an expense ratio of 1.59%. It earned an annual return of 0.70%. The fund focuses on growth-potential stocks that are undervalued and adjusts its sector allocation according to market conditions.
- UTI Small Cap Fund
The UTI Small Cap Fund holds an AUM worth ₹5,213.72 crore while charging an expense ratio of 0.87%. It earned a return of 4.27% in a year. The fund focuses on companies that have strong management teams and earning capabilities, and prefers to balance risk and returns by maintaining a diverse portfolio.
- Bandhan Small Cap Fund
The AUM of Bandhan Small Cap Fund is valued at ₹28,466.18 crore, with an expense ratio of 0.35% and reported an annual return of 7.95%. The fund focuses on emerging companies with growth potential through active stock selection.
- Invesco Small Cap Fund
The Invesco Small Cap Fund recorded an AUM of ₹13,384.88 crore while charging an expense ratio of 0.42%. The annual return earned on this fund is 13.88%. It uses the bottom-up stock-picking strategy to select stocks that also have growth potential and good valuation.
How We Selected These Penny Stock Funds?
The mutual funds were selected based on qualitative and quantitative factors suitable for a wide range of investors.
- Asset Under Management (AUM): AUM represents the total size of investors’ money and their confidence in the fund. It indicates the fund’s operational stability and efficient management.
- Expense Ratio: Investors are charged a fee periodically for maintaining and operating their funds. It has a significant impact on the returns earned by the fund.
- Absolute Returns: The returns generated within a time duration to evaluate the consistency and profitability of the fund.
- Growth potential: The investments must have scope for future growth. Investors must evaluate the fundamentals before selecting penny stock funds.
Penny Stock Funds VS Other Funds Category
The table below shows how Penny Stock mutual funds differ from other mutual funds.
| Basis | Penny Stock Funds | Mid Cap Funds | Large Cap Funds |
| Primary Investment | Funds exposed to low-priced or penny stocks | Companies ranked between 101st and 250th in the market cap | Companies ranked between 1st and 100th in the market cap |
| Risk | Very High | Moderate to high | Moderate |
| Return | High but includes volatility | High | Moderate |
| Suitable for | Aggressive investors with high risk appetite | Investors seeking growth with moderate risk | Conservative to moderate investor |
Benefits and Risks of Penny Stock Mutual Funds
The benefits of penny stock mutual funds are listed below.
- Growth Potential: These funds have the potential to grow if the investments perform well over time.
- Diversification: These funds are suitable for investors who seek to diversify their investments across multiple market securities.
- Emerging companies: They allow investors to gain exposure to emerging and small companies that have the potential to grow and become larger companies.
- Professional management: The fund allows expert fund managers to facilitate and maintain the investments by selecting appropriate investments and making adjustments when required.
The risks associated with penny stock mutual funds are listed below.
- Uncertain returns: The stocks may underperform and deliver unfavourable returns, increasing the possibility of uncertain returns.
- High Volatility: The performance of penny stock funds highly depends on market fluctuations, increasing the risk of unfavourable situations and may lead to lower returns.
- Liquidity Risk: These funds usually have low trading volume, which may reduce investors’ ability to buy and sell holdings.
Who Should Consider And Avoid Penny Stock Mutual Funds?
Investors who should consider investing in penny stock mutual funds are given below.
- Aggressive investors: Investors who have a high risk tolerance and seek to invest in growth potential stocks can choose to invest in a penny stock fund.
- Long-term investors: Investors who are committed to investing for a longer duration and aim to create wealth can invest in a penny stock fund.
- Experienced portfolios: Investors who invest in multiple stocks and maintain a diversified portfolio, and consider investing a part of their portfolio in high-risk funds, can invest in a penny stock fund.
Investors who should avoid investing in penny stock mutual funds are listed.
- Conservative investors: Investors who aim to invest for stability and avoid risk-oriented funds may avoid penny stock funds.
- Retirees and beginners: Beginners with less market experience and a low risk appetite may avoid these funds. Also, retirees who seek stable, secure income may avoid these funds.
- Liquidity-focused traders: Traders who seek convenience to sell their holdings without any impact on the price may avoid these funds.
How To Choose A Penny Stock Mutual Fund?
Investors can choose a suitable fund by evaluating the fund’s necessary fundamentals and matching them with their investment goals.
- Check the fund portfolio: Investors must check the composition of the fund in its official document and evaluate the proportion of exposure to small and emerging company stocks.
- Historical Performance: Investors must evaluate the fund’s past performance, which will provide an idea of consistency and efficiency. Avoid relying on recent performance.
- Risk profile: Investors must assess the fund’s risk profile and evaluate if it aligns with their investment objectives and risk tolerance.
- Fund manager: It is equally important to evaluate the track record of the professional fund manager because stock selection and risk management decisions impact the fund’s performance.
SIP vs Lump Sum For Penny Stock Funds
Investors can choose to invest in penny stock funds through both SIPs and Lump sums. Let’s understand which is more suitable for investors.
| Basis | SIPs | Lump sum |
| Meaning | Investing a fixed amount regularly | Investing a large amount in a single transaction |
| Suitable for | Salaried investors with regular incomes | Suitable for investors with a large amount of available capital |
| Risk | Relatively lower risk due to distributed investments | Higher risk since the investment is entirely exposed to the market |
| Volatility impact | Reduces the impact of market fluctuations | Vulnerable to frequent market movements |
Direct vs Regular Penny Stock Funds
Let’s understand the difference between direct and regular penny stock funds.
| Basis | Direct Penny Stock Funds | Regular Penny Stock Funds |
| Meaning | Purchasing through AMCs directly without any intermediaries | Purchased through banks, brokerage platforms, or distributors |
| Returns | Comparatively higher returns due to lower cost | Lower returns because of certain fees and charges |
| Suitable for | Experienced investors comfortable with managing portfolio independently | Investors who require professional guidance |
| Cost | Lower cost because no intermediaries | High cost because it involves intermediaries |
Taxation of Penny Stock Mutual Funds
The taxation on capital gains of penny stock mutual funds depends on the holding duration of the asset.
- Short-term Capital Gain: When the investment is redeemed within less than one year or 12 months, it is considered Penny Stock capital gains and is taxed at 20%.
- Long-Term Capital Gain: When the investment is redeemed after 12 months, it is considered long-term capital gains and is taxed at a rate of 12.5% on the total income with an exemption of ₹1.25 lakhs.
FAQs
Based on the data provided, some of the leading funds include Invesco India Small Cap Fund, Bank of India Small Cap Fund, Bandhan Small Cap Fund, Nippon India Small Cap Fund, and Quant Small Cap Fund.
Penny Stock mutual funds may be suitable if you have a high risk appetite and a long-term investment horizon. However, you should assess your financial goals and risk tolerance before investing.
Based on the provided data, Bank of India Small Cap Fund has delivered the strongest one-year return among the listed funds
Compare the fund’s portfolio, past returns, expense ratio, AUM, risk level, and the fund manager’s track record to determine whether it aligns with your investment objectives.
These funds are generally suitable for investors who can tolerate higher market volatility and are willing to stay invested for the long term.
According to the provided data, Bank of India Small Cap Fund recorded the highest one-year return of 18.53%.
No. They are market-linked investments and carry risks such as volatility, liquidity issues, and potential capital loss.
Investors with a long-term perspective may consider investing after assessing their risk tolerance and investment objectives.
Penny stock mutual funds offer higher return potential but come with significantly higher risk, whereas FDs provide relatively stable returns with lower risk.
