Summary
Small-cap mutual funds invest at least 65% of the portfolio holdings in small-cap equity stocks.
Invesco India and Nippon India Small Cap Fund have recorded significant 3-year returns and have among the highest asset sizes.
They offer long-term growth potential, but are highly volatile and risky compared to large-cap funds.
Investors must evaluate the investment objective, past performance, and portfolio composition before investing.
Small-cap funds prefer to invest in small-cap companies that are early in the stage of growth, offering potential for capital appreciation in the long run. They are highly volatile and heavily sensitive to economic changes, making them suitable for investors with a high risk appetite.
Best 10 Small-Cap Mutual Funds: Quick Comparison
Small-cap funds are mutual funds that allocate at least 65% of their asset into small-cap and emerging companies, as per SEBI guidelines. Small-cap companies are those ranked 251st and below in market capitalisation. The best small-cap mutual funds in India as of 7th August, 2026 are listed below. The list below includes the best small-cap funds, based on their NAV, AUM, expense ratio, and returns.
| Name | NAV | AUM (In ₹ Crores) | Expense Ratio (%) | 1 year Returns (%) | 3 years Returns (%) | 5 years Returns (%) | Benchmark |
| Invesco India Small Cap Funds | 54.17 | 13,384.88 | 0.64 | 19.08 | 24.87 | 21.02 | BSE 250 SmallCap TR INR |
| Bank of India Small Cap Funds | 63.98 | 2,572.40 | 0.75 | 25.28 | 23.33 | 20.52 | Nifty SmallCap Total Return Index |
| Bandhan Small Cap Fund | 57.00 | 28,466.18 | 0.58 | 13.92 | 20.02 | 20.14 | BSE 250 SmallCap TR INR |
| Nippon India Small Cap Fund | 208.09 | 78,407.03 | 0.70 | 11.21 | 17.82 | 20.00 | Nifty SmallCap 250 TR INR |
| Quant Small Cap Fund | 314.55 | 32,739.05 | 0.95 | 15.47 | 19.37 | 19.19 | Nifty SmallCap 250 TR INR |
| LIC MF Small Cap Fund | 38.97 | 743.33 | 1.44 | 17.58 | 19.23 | 18.90 | Nifty SmallCap 250 TR INR |
| ITI Small Cap Fund | 37.72 | 3,321.83 | 0.84 | 20.27 | 26.44 | 18.72 | Nifty SmallCap 250 TR INR |
| Edelweiss Small Cap Fund | 53.83 | 6,579.72 | 0.65 | 13.00 | 18.18 | 18.56 | Nifty SmallCap 250 TR INR |
| HSBC Small Cap Fund | 99.95 | 17,830.20 | 0.77 | 12.80 | 16.66 | 18.31 | Nifty SmallCap 250 TR INR |
| DSP Small Cap Fund | 250.81 | 19,634.90 | 0.82 | 17.70 | 18.60 | 18.08 | BSE 250 SmallCap TR INR |
Top 10 Small-Cap Mutual Funds
While small-cap funds can provide significant returns over the long term, choosing the right fund can be challenging. Below is a description of the top 10 small-cap funds, including their strength and weaknesses.
Invesco India Small Cap Funds
The Invesco India Small Cap Fund maintains a diversified portfolio across several small-cap companies and is known for its balanced stock selection in quality companies with growth potential. It has an AUM worth ₹13,384.88 crore with an expense ratio of 0.64%, and recorded a 1-year return of 19.08%.
Bank of India Small Cap Funds
The Bank of India Small Cap Fund are for investors seeking exposure to an actively managed, selected small-cap portfolio. The fund has generated a significant 1-year return of 25.28%, indicating its ability to capture recent market opportunities. However, it has a relatively smaller AUM of ₹2,572.40 crore, which may lead to performance fluctuation during volatile market conditions.
Bandhan Small Cap Fund
The Bandhan Small Cap Fund is one of the largest small-cap funds with a competitive expense ratio of 0.58% and maintains a diversified portfolio of small-cap companies across multiple sectors. The fund has a large AUM of ₹28,466.18 crore, which can be challenging to take positions in smaller companies.
Nippon India Small Cap Fund
The Nippon India Small Cap Fund is the largest small-cap fund in India with a history of investing in more than 100 small-cap companies. The fund is known for its broad market coverage and comes under one of the deepest research-driven small-cap portfolios in the industry. It has an AUM of ₹78,407.03 crore with an expense ratio of 0.70%
Quant Small Cap Fund
The Quant Small Cap Fund has a data-driven investment model with a dynamic investment strategy that makes fund adjustments based on market trends and quantitative indicators. It has a strong historical record of generating a 3-year return of 19.37% and a 5-year return of 19.19%.
LIC MF Small Cap Fund
The LIC Small Cap Fund allows exposure to selected high-quality funds, allowing managers to focus on a compact portfolio. It is suitable for investors seeking a focused small-cap strategy backed by their data -driven research framework. However, the fund has a relatively smaller AUM of ₹743.33 crore with a high expense ratio of 1.44%.
ITI Small Cap Fund
The ITI Small Cap Fund has delivered one of the strongest 3-year returns of 26.44% among the listed funds, and a moderate AUM of ₹3,321.83. It focuses on emerging small-cap funds with growth potential. It has recorded a 1-year return of 20.27% with an expense ratio of 0.84%.
Edelweiss Small Cap Fund
The Edelweiss Small Cap Fund is known for maintaining a diversified portfolio with an asset size of ₹6,579.72 crore, a competitive expense ratio of 0.65%, and a focus on quality companies. The fund follows a research-driven strategy that prioritises long-term growth potential over short-term market trends.
HSBC Small Cap Fund
The HSBC Small Cap Fund focuses on financially sound businesses with growth potential instead of taking portfolio risk. The fund benefits from its research capabilities and specifically performs stock selectiona nd allocation. It has an asset size of ₹17,830.20 crores with an expense ratio of 0.77%.
DSP Small Cap Fund
The DSP Small Cap Fund focuses on investing in high-quality companies with growth potential, balancing long-term wealth building with risk management. The fund has recorded significant returns of 18.60% in 3 years and 18.08% in 5 years, while maintaining a portfolio with a total asset size of ₹19,634.90 crore.
How We Selected These Small-Cap Funds?
The small-cap funds are selected based on their qualitative and quantitative attributes.
- 5-year CAGR: Long-term performance is given priority to identify funds that have recorded significant returns over a longer period rather than benefiting from short-term market movements.
- Asset Under Management (AUM): AUM reflects investor interest and the fund’s asset size. It includes small-cap funds that have attracted investor interest, along with funds that have delivered competitive returns despite having a smaller asset size.
- Expense ratio: Cost efficiency is also considered while selecting a small-cap fund, since expense ratios directly impact the overall returns. A high expense ratio may result in low net returns.
- Investment strategy: The investment strategy of investors is also important while choosing a small-cap fund. Funds that invest in high-quality companies that have the potential to grow in the future are given higher preference.
Small-Cap Funds VS Other Funds Category
The table below shows how small-cap mutual funds differ from other mutual funds.
| Basis | Small-cap Fund | Mid-cap Fund | Large-cap Fund |
| Investment Strategy | Emerging businesses ranked 251st and below by market capitalisation | Companies ranked between 101st and 250th in the expansion phase | India’s top 100 listed companies with established market positions |
| Investment Objective | Capture high-growth opportunities by investing in strong growth potential companies | Balanced combination of growth potential and lower risk than small-cap companies | Relatively stable returns by investing in leading companies |
| Risk | High because small-caps are highly sensitive to market changes | Higher than large-caps and lower than small-caps | Lower because of established market position |
| Suitable for | Investors with high risk tolerance and aiming for long-term wealth creation | Investors seeking growth opportunities with comparatively lower risk than small-caps | Investors seeking stable equity exposure |
Benefits and Risks of Small-Cap Mutual Funds
The benefits of investing in small-cap mutual funds are listed below.
- Higher growth potential: Most small-cap companies have the potential to grow further because many of these firms are at the initial stage of growth and expansion. An increase in market share, profitability, and new markets for small-cap companies may cause an increase in the stock market.
- Opportunity to invest in emerging businesses: these investments offer the chance to invest in future market leaders. Investing in growing businesses is profitable if they include a good business model and effective management.
- Diversification in equity: small-cap funds diversify their investment across multiple industries and sectors, reducing the risk of weak performance of individual stocks.
- Active stock selection: These funds are managed actively. Fund managers analyse multiple businesses and actively invest in businesses that can generate good returns and possess some competitive advantage.
The risks associated with small-cap mutual funds are listed below.
- Increased market volatility: Small-cap stocks tend to fluctuate more compared to large-cap stocks. The funds may experience strong declines during any market correction.
- Longer investment horizon: It takes time for a small company to reach its growth potential. Hence, small-cap funds need to be held for the long term to reach their potential.
- Low liquidity: Most small-cap funds have lower liquidity compared to large-cap funds. Buying and selling these stocks may become difficult during certain market conditions.
- High business risk: Small-cap funds are more likely to have fewer financial resources and a limited history of operations. They are also prone to economic changes.
Who Should Consider And Avoid Small-Cap Mutual Funds?
Investors who should opt for small-cap mutual funds are mentioned below.
- Long-term investors: Investors who have a long-term investment horizon and allow their investment to grow over the long run can choose to invest in small-cap funds.
- High-risk takers: Since small-cap funds are exposed to high market risk, investors who have a high risk tolerance can opt to invest in these funds.
- Growth Seekers: Investors who prefer to invest in companies with growth potential that have room for expansion in future can choose to invest in small-cap funds.
Investors who should avoid small-cap mutual funds are mentioned below.
- Short-term planners: Investors with a short-term investment horizon and who may need their money within a short period of time can choose to avoid these funds.
- Low risk tolerance: Conservative investors who have a low risk appetite and prefer stable earnings can choose to avoid small-cap funds.
- Sensitive buyers: Investors who only chase high returns and exit the market when the market falls can avoid investing in a small-cap fund.
How To Choose A Small-Cap Mutual Fund?
Small-cap funds invest in emerging companies that have the potential for future expansion and require a long time horizon. Therefore, investors must analyse and choose a suitable small-cap fund that aligns with their objective and risk appetite.
- Objectives: Investors must analyse the fund’s investment objective and risk profile and align it with their investment goals and risk appetite. These funds require a longer time horizon to grow and average out the short-term market impacts.
- Expense Ratio: Investors must check the expense ratio as it directly impacts the net returns earned by the fund. If the expense ratio is higher, net returns might decrease significantly.
- Past Performance: Investors must focus on the long-term performance of the funds along with its recent performance. They must analyse the fund’s performance during different market conditions to understand its consistency in generating returns.
- Portfolio composition: Investors must evaluate the selection and allocation of the fund included in the portfolio. This provides information on its diversification across multiple industries and sectors.
SIP vs Lump Sum For Small-Cap Funds
Investors can choose to invest in small-cap 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 at regular intervals | Investing a large amount of capital at once |
| Suitable for | These are suitable for beginners and investors with regular incomes | These are best suited for investors with surplus money available |
| Risk | Relatively lower risk because of rupee cost averaging | Higher Small-Cap market risk since it is exposed to the market |
| Returns | Steady returns over time, but might be lower in a steadily rising market | May generate high returns if invested during favourable prices |
Direct vs Regular Small-Cap Funds
Let’s understand the difference between direct and regular small-cap funds.
| Basis | Direct Small-Cap Funds | Regular Small-Cap Funds |
| Meaning | Directly purchasing from AMCs without any involvement of intermediaries | Purchased through brokerage platforms, banks, or distributors |
| Returns | Relatively higher returns due to lower cost | Relatively lower returns because of certain fees and charges |
| Suitable for | Investors comfortable with independent decision-making and investment management | Investors who seek expert guidance |
| Cost | Low investment cost because of no intermediaries | High cost because it involves distributors and intermediaries |
Taxation of Small-Cap Mutual Funds
Small-cap funds primarily invest in the equity stocks of various small-cap companies across different sectors and industries. The taxation on capital gains of small-cap 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 short-term 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 listed funds and their asset size and return data as of 7th August 2026, Invesco India Small Cap Fund, Bank of India Small Cap Fund, ITI Small Cap Fund, Bandhan Small Cap Fund, and Quant Small Cap Fund are among the better-performing funds across the reported periods.
Small-cap funds may be considered by investors with a long-term horizon and high risk tolerance. Their suitability depends on the investor’s goals and ability to handle market volatility.
There is no single best fund for every investor. Based on the given data, Invesco India Small Cap Fund has the highest 5-year return among the listed funds at 21.02%, while ITI Small Cap Fund has the highest 3-year return at 26.44%
Compare factors such as long-term returns, expense ratio, portfolio composition, investment objective, and risk profile before selecting a fund.
Small-cap funds may suit long-term investors, high-risk takers, and growth seekers who can remain invested through market fluctuations.
Among the funds listed, Bank of India Small Cap Fund has the highest 1-year return at 25.28%, followed by ITI Small Cap Fund at 20.27%.
No. Small-cap funds are subject to market risk and can experience significant volatility, particularly during market corrections.
Compare factors such as long-term returns, expense ratio, portfolio composition, investment objective, and risk profile before selecting a fund.
Small-cap funds may suit long-term investors, high-risk takers, and growth seekers who can remain invested through market fluctuations.
Among the funds listed, Bank of India Small Cap Fund has the highest 1-year return at 25.28%, followed by ITI Small Cap Fund at 20.27%.
No. Small-cap funds are subject to market risk and can experience significant volatility, particularly during market corrections.
Investors with a long-term investment horizon who have a high risk tolerance and prefer companies with growth potential across multiple sectors and industries.
Small-cap funds can deliver high returns over the long term, associated with high volatility risk. While FDs provide predefined returns with relatively lower risk. So, the choice depends on the investor’s risk tolerance and financial objective.
