Best 10 Small Cap Mutual Funds to Invest

What is a Small Cap Fund?

Small cap funds are equity funds, which invest at least 65% of their assets in equity and equity related investments of small cap companies. According to the SEBI regulations, small cap companies are those ranked below top 250^th companies in terms of market capitalization.

Get Your Free Credit Report with Monthly Updates Check Now

Why invest in Small Cap Funds?

• Small cap funds offer a broader universe for investment than large cap, midcap or sector/thematic funds
• Small cap companies offer better growth prospects due to the presence of new/emerging segments growing at a faster pace
• Small cap companies also have greater potential to gain market share due to their new technology or products/services
• Company specific factors impacts the returns of small cap stocks more than macro-economic factors
• Small cap space is a relatively inefficient market with under-owned and under-researched companies
• Lack of awareness and price discovery of small cap companies among market participants gives them better growth potential
• Small-cap stocks tend to be grow faster than large and midcap stocks during economic recoveries

Also Check:- List of High Return Mutual Funds

Table of Best Small Cap Funds:

(Data as on August 20, 2021: Source: Value Research)

Investment strategies of best small cap funds

1. Axis Small Cap Fund

• Bottom up approach to investing aimed at identifying long term opportunities
• Invests primarily in high conviction small cap companies
• Looks for stability, quality and scalability during stock selection
• Prefers companies with
• Strong promoter pedigree
• Sound balance sheet
• Strong corporate governance
• Capable of sustaining good ‘Return on Equity’ and ‘Return on Capital Employed’
• Offers sustainable returns with lower volatility
• Ability to withstand event shocks

Also Read:- Dynamic Equity Funds

2. SBI Small Cap Fund

• Follows a blend of growth and value style of investing
• Uses bottom-up stock selection approach to identify high growth business.
• Prefers businesses with scalability and the ability to benefit from the Indian economy’s growth potential

Checking Credit Report monthly has no impact on Credit Score Check Now

3. Nippon India Small Cap Fund

• Identifies growth companies having reasonable size, rational valuation and quality management
• Aims at generating relatively better risk-adjusted performance
• Adopts prudent risk management measures like margin of safety and diversification during stock selection
• Aims at an optimal mix of growth, value, economic revival and thematic plays
• Strives to build a portfolio adequately reflecting a cross-section of the growth areas of the economy
• Prefers ‘buy and hold’ strategy at most times
• Can resort in selling when valuations become too high even if the stocks have reasonable long term growth prospects

Also Read:- What is the Difference Between Large Cap and Small Cap Funds?

4. Kotak Small Cap Fund

• Prefers companies in their early and more dynamic stage of their life cycle but not considered new or emerging
• Usually invests in companies with
• proven products and services
• potential to sustain above average earnings growth
• stock prices undervaluing growth prospects,
• promoter integrity and capability
• low leverage
• simple business model
• ability to generate free cash flow
• experience of various market cycles
• Prefers to stay away from cyclical stocks

5. HDFC Small Cap Fund

• Prefers well-managed small cap companies with sustainable business, sound financial strength and reasonable growth prospects
• Uses quality metrics like cash flows, return on equity and return on capital employed to identify opportunities
• Prefers undervalued businesses

6. ICICI Prudential Small Cap Fund

• Prefers well-researched small-cap companies with potential to generate higher returns and become future market leaders in their segments
• Aims at price discovery of small-cap stocks usually below their full potential
• Uses following parameters used for stock selection
• corporate governance
• sector opportunity
• leverage
• return on equity
• earnings potential
• valuations
• management quality
• sensitivity to various economic factors

7. DSP Small Cap Fund

• Invests in under-researched and under-owned stocks generally uncorrelated with broader markets.
• Focuses on businesses with scalability, reasonable valuations and good management quality
• Deals with expensive valuation scenarios by investing relatively cheaper companies
• Prefers companies
• with simple & predictable business
• on the verge of a turnaround
• having competitive advantages
• belonging to large sector with a strong growth potential
• having high return on equity and positive cash flows

Also Read:- What is Benchmark in Mutual Fund? – How to Use, Top Fund List, Types

8. L&T Emerging Business Fund

• Invests in companies in the early stage of their development and having the potential to grow their revenue and profits at a higher rate as compared to broader market
• Follows bottom-up approach for stock selection
• Uses their proprietary G.E.M (Generation of Ideas, Evaluation of companies and Manufacturing and Monitoring of portfolios) investment approach
• Focuses on valuation by investing in stocks with an adequate margin of safety

9. Franklin Smaller Companies Fund

• Identifies high growth companies having the potential transform into tomorrow’s market leaders
• Follows an active investment strategy taking aggressive/defensive postures based on market opportunities

10. Aditya Birla Sun Life Small Cap Fund

• Uses bottom-up approach for stock selection
• Focus on the fundamentals, management quality & competitive advantages of companies
• Uses fundamental research with “growth at reasonable price” philosophy for investing
• Prefers companies prudent in capital allocation and generating consistent positive cash flows and wealth for investors
• Avoids companies with poor corporate governance
• Avoids leveraged companies with high capex intensity for growth

Risk of investing in Small Cap Funds

• Small Cap stocks tend to be more volatile than large and midcap stocks over the short- to medium term
• Liquidity risk of small cap stocks is higher than those of large and midcap stocks
• Small cap companies tend to be more adversely affected than large and midcap companies during bearish market conditions

Who should invest in Small Cap funds?

• Investors aiming to benefit from the higher growth potential and re-rating scope of small cap companies
• Mature long term investors with slightly higher risk appetite and past experience in market volatility
• Those who are able to absorb short term volatility and patiently wait with a time horizon of at least 5 years
• Investors should ideally stay invested in small cap funds for at least 7 years to derive maximum benefit from an entire economic cycle

You may be Interested In:

Best Large Cap Funds
Best Large and Mid Cap Funds
Best Multicap Funds
Best Mid Cap Funds
Best Tax Saver Funds (ELSS)