Top Micro Cap Mutual Funds to Invest Online in 2024
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Ever since stock markets were created, investors have consistently crafted strategies aimed at surpassing the market’s average return. Some opt for investments in large corporations, while others focus on smaller companies. Some may disregard company size altogether and invest in companies of any scale as long as they exhibit the potential to generate returns that outpace the market. Lastly, others primarily might want to invest in micro cap companies. Sounds interesting, right? Let’s discuss the best micro cap mutual funds and how you can invest in them.
What are Micro Cap Mutual Funds?
Micro Cap Mutual Funds are mutual fund investments that focus on the smallest publicly traded known ‘micro companies’ in the stock market. In simpler terms, it’s like putting your money into a basket of tiny companies with the hope that some of them will grow significantly, providing the potential for higher returns.
Micro cap funds allow investors to buy a collection of stocks from these smaller companies. The limited liquidity and a small shareholder base can make these extremely small-cap companies more susceptible to market shocks. However, for investors willing to embrace these elevated risks, the potential returns from these funds can surpass the fund’s overall size by a significant margin.
What is the Size of Micro-Cap Funds?
The definition of micro-cap funds differs in different fund houses. Some of the fund houses invest based on market capitalisation, while others do so based on the S&P BSE SmallCap Index. The top 100 companies in the list are categorised as large-cap. While the immediate next 100 are mid-cap, followed by the next 100 referred to as small cap. The remaining companies, ranking 301 and beyond, are classified as micro-cap companies.
List of Best Micro Cap Mutual Funds India 2024
Here is a list of the best micro cap mutual funds India that you might want to consider.
Name | Sub-Category | AUM | CAGR 3Y | Expense Ratio |
---|---|---|---|---|
Sundaram LT Micro Cap Tax Adv Fund-Sr VI | Equity Linked Savings Scheme | 37.93 | 43.37 | 1.16 |
Sundaram LT Tax Adv Fund-Sr III | Equity Linked Savings Scheme | 33.68 | 41.82 | 1.15 |
Bank of India Credit Risk Fund | Credit Risk Fund | 149.98 | 41.46 | 1.17 |
LIC MF Infra Fund | Sectoral Fund - Infrastructure | 130.27 | 33.53 | 1.49 |
Bank of India Mfg & Infra Fund | Sectoral Fund - Infrastructure | 142.25 | 33.42 | 1.27 |
Kotak India Growth Fund-Sr 4 | Multi Cap Fund | 120.65 | 29.80 | 0.34 |
ICICI Pru India Equity | FoFs (Domestic) - Equity Oriented | 79.04 | 28.66 | 0.86 |
Taurus Infrastructure Fund | Sectoral Fund - Infrastructure | 6.62 | 27.97 | 2.14 |
Disclaimer: Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.
Note: The data on the top micro cap companies in India in the list is from 5th January, 2024. However, for real-time updates on stock prices and market trends, visit the smallcase stocks collection today!
Top Micro Cap Funds – Overview
Let’s discuss the top 8 micro cap funds in India.
Sundaram LT Micro Cap Tax Adv Fund-Sr VI
This fund, managed by Sundaram Mutual Fund, focuses on micro-cap stocks, offering tax advantages for investors. It aims to leverage the growth potential of smaller companies while providing tax benefits.
Sundaram LT Tax Adv Fund-Sr III
This is managed by Sundaram Mutual Fund. This fund emphasises tax advantages in a long-term investment strategy. It aims to deliver tax benefits while seeking growth opportunities across market segments.
Bank of India Credit Risk Fund
This credit risk fund from Bank of India Mutual Fund is designed to generate returns by primarily investing in debt instruments with credit risk. Investors should be mindful of the associated credit risks.
LIC MF Infra Fund
The LIC Mutual Fund Infra Fund focuses on the infrastructure sector, aiming to capitalize on growth opportunities within this segment. It offers investors a way to participate in the development of infrastructure projects.
Bank of India Mfg & Infra Fund
Managed by Bank of India Mutual Fund, this fund is tailored for investors seeking exposure to both the manufacturing and infrastructure sectors. It aims to benefit from the growth potential in these key areas.
Kotak India Growth Fund-Sr 4
This fund is a part of the Kotak India Growth Series. It focuses on long-term capital appreciation by investing in a diversified portfolio of equity and equity-related instruments. It is managed by Kotak Mahindra Mutual Fund.
ICICI Pru India Equity
Managed by ICICI Prudential Mutual Fund. It aims for long-term capital appreciation by investing in a diversified portfolio of equity and equity-related instruments.
Taurus Infrastructure Fund
This fund, managed by Taurus Mutual Fund, specifically targets investments in the infrastructure sector. It aims to benefit from the growth potential in infrastructure-related industries.
How Do Micro Cap Mutual Funds Work?
Micro Cap Mutual Funds usually invest in companies with a market capitalisation of less than Rs. 3500 crore in India. These companies can be typically small, relatively unknown, and have the potential for high growth but also come with a higher level of risk. While these companies might lack the established names of giants, they may hold immense potential for rapid growth.
Micro Cap vs Small Cap Mutual Fund
Micro Cap and Small Cap Mutual Funds are both types of equity mutual funds that focus on companies with relatively smaller market capitalisations, but they differ in the size range of the companies they target. Let’s understand their differences in a tabular form.
Feature | Micro Cap Mutual Fund | Small Cap Mutual Fund |
---|---|---|
Market Capitalization | Invests in companies with a market cap typically below Rs. 3500 crores. | Market cap ranking less than Rs. 5000 Crore |
Risk and Volatility | Generally, liquidity is better compared to micro-cap funds, but liquidity can vary based on specific holdings. | Comparatively lower than micro-cap funds as small-cap companies are more established. |
Growth Potential | Can offer significant growth potential, as smaller companies may have more room for expansion. | Presents growth potential, but may be less than micro-cap funds |
Diversification | Limited diversification | Comparatively better diversification benefits, but not as much as mid-cap or large-cap funds. |
Investor Profile | Suited for investors with a higher risk tolerance and a long-term investment horizon. | Appeals to investors seeking growth opportunities with a moderate to high-risk tolerance. |
Investment Strategy | Focus on identifying undervalued micro-cap companies | Focus on small-cap companies with growth potential |
Liquidity Concerns | Lower liquidity compared to mid & larger-cap funds | Presents growth potential but may be less than micro-cap funds |
Features of Micro Cap Mutual Funds
Let’s have a look at the features of the best micro cap mutual funds in India.
- Market Coverage: Can primarily invest in companies with market capitalisation ranging from Rs. 150 crore to Rs. 3,500 crore (depending on fund definition).
- Sector Diversification: Spread investments across various sectors like IT, healthcare, banking, etc., to mitigate risks associated with individual industries.
- Minimum Investment: Typically have lower minimum investment requirements compared to other mutual funds, making them accessible to a wider range of investors.
- Higher Volatility: Micro cap stocks can be generally more volatile due to their smaller size.
- Tax Benefits: Enjoy similar tax benefits (long-term capital gains tax) as other equity mutual funds.
Who Should Invest in Micro Cap Mutual Funds?
Well, Micro Cap Mutual Funds might not be for everyone! They cater to a specific type of investor who thrives on high-risk, high-reward possibilities. While the potential for significant returns exists, investors need to conduct thorough research, understand the higher level of risk, and be patient, as the growth of micro-cap stocks often occurs over an extended period.
Factors to Consider Before Investing in Micro Cap Mutual Funds
Before investing in micro cap funds in India, you must keep the following basic points in mind listed down below:
- Risk Tolerance: Assess your ability to withstand potential volatility in micro-cap stocks.
- Investment Horizon: Determine if you have a long-term perspective for potential growth.
- Research Capability: Ensure you can conduct thorough research due to limited analyst coverage.
- Portfolio Diversification: Consider how micro-cap funds fit into your overall portfolio diversification.
- Patience and Discipline: Be patient and disciplined, as micro-cap investments may take time to yield results.
Risks Involved While Investing in Micro Cap Funds India
Given the size of micro cap companies, some investors might be drawn to invest in them. Therefore, it’s advisable to have a look at the associated potential risks below:
- High Volatility: Micro cap companies can be more sensitive to market fluctuations and economic changes than larger, established companies.
- Limited Liquidity: Since Micro-Cap companies are traded less frequently, selling your shares might be difficult and could take time.
Benefits of Investing in Micro Cap Mutual Funds in India
Let’s have a look at the undeniable benefits of the best micro cap mutual funds India.
- Focus on Micro-Cap Companies: These are typically small, relatively unknown companies with a market capitalisation of less than Rs. 3500 cr. Imagine a young, innovative tech startup with a promising new product – that’s the kind of company a micro cap mutual fund might invest in.
- High Growth Potential: The main attraction of micro cap mutual funds is the potential for significant returns. Since these companies might be still in their early stages, they have room to grow rapidly if their business takes off. It’s like planting a seed and hoping it blossoms into a giant tree.
- Active Management: Micro cap mutual funds are usually actively managed by fund managers who have expertise in researching and picking small, promising companies. They spend their time digging deep to find hidden gems with the potential to explode.
- Diversification: While each micro cap company carries its risks, investing in a micro cap mutual fund helps spread that risk across multiple companies and sectors. It’s like putting your eggs in different baskets to avoid losing everything if one basket falls.
As always, investors must do their own research and/or consult their financial advisor before investing.
How to Choose Best Microcap Funds for Investing?
Here’s how to choose the best microcap funds for your portfolio:
- Prioritise Your Risk Tolerance and Investment Horizon: Identify and prioritise your risk tolerance since micro cap mutual funds can be highly volatile.
- Fund Management Matters: Find a fund with a seasoned manager who consistently navigates the microcap space.
- Analyze the Investment Strategy: Does the fund’s focus align with your goals? Look for growth-oriented funds with diversified sector exposure to mitigate risk.
- Dig into Performance & Risk Management: Check the fund’s historical returns, volatility levels, and risk management practices. Past performance isn’t a guarantee, but it can offer insights.
- Fees & Expenses: Compare expense ratios and other fees across similar funds. Lower fees may translate to higher potential returns for you.
- Consider Liquidity: Understand that selling microcap shares can be slow.
What are the Returns on the Best Micro Cap Mutual Funds & How are they Calculated?
The returns on the best Micro Cap Mutual Funds can vary widely. These can also be influenced by the performance of the underlying portfolio of micro-cap stocks. Returns are typically calculated as the percentage change in the fund’s net asset value (NAV) over a specific period, often measured on a monthly, quarterly, or annual basis. Investors should check the fund’s historical performance, considering both short-term and long-term returns. It’s crucial to understand that historical returns are not indicative of future performance, and factors like market conditions, fund management, and economic trends play significant roles in shaping returns.
Taxation on Micro Cap Mutual Funds as per Union Budget of 2024-25
The taxation on capital gains from your mutual fund investments is based on their holding periods and asset allocation. A few revisions were made to the tax rates, depending on their types, in the Union Budget 2024-25. In order to select the best micro cap mutual funds, it is important to learn about these revisions as well. They include:
Equity Mutual Funds
- Short-Term Capital Gains (STCG): The gains from equity mutual funds held for less than 12 months are now taxed at 20%. This is an increase from the previous tax rate of 15%.
- Long-Term Capital Gains (LTCG): For equity mutual funds held for over a period of over 12 months, gains are classified as long-term capital gains. The new budget introduces these key changes to the LTCG:
- Tax-Free Limit: The capital gains up to Rs. 1.25 lakh per year are tax-free. This is an increase from the previous limit of Rs. 1 lakh.
- Tax Rate: The gains exceeding Rs. 1.25 lakh are now taxed at a flat rate of 12.5%. This is an increase from the previous rate of 10%.
- Indexation: The benefit of indexation, which allowed investors to adjust the purchase price for inflation, has been removed for all asset classes, including equity mutual funds.
Indexation was a method that allowed investors to adjust the purchase price of assets for inflation. This adjustment reduced taxable profits when selling assets like property or gold. Previously, these long-term capital gains were taxed at 20%. The new rule imposes a flat 12.5% tax on all long-term capital gains but eliminates any indexation benefits.
Capital Gains Tax | Holding Period | Old Rate | New Rate |
Short-Term Capital Gains (STCG) | Less than 12 months | 15% | 20% |
Long-Term Capital Gains (LTCG) | More than 12 months | 10% | 12.50% |
Debt Mutual Funds
- Short-Term Capital Gains (STCG): If you sell your debt fund units within a period of 36 months, the gains are classified as short-term capital gains. The STCG will be taxed according to your income tax slab rate.
- Long-Term Capital Gains (LTCG): For debt funds held for a period over 36 months, the gains are classified as long-term capital gains. The new budget outlines a few changes on the LTCG for debt funds, including:
- Tax Rate: A flat 12.5% tax rate applies to these gains.
- No Indexation Benefit: The previous benefit of adjusting the purchase price for inflation is removed. Now, the entire gain after three years is taxable at 12.5%.
- Change in Holding Period for Specified Mutual Funds: Previously, debt mutual funds with a holding period of over 36 months were taxed based on the investor’s tax slab, classified as Long-Term Capital Gains (LTCG). Now, for specified mutual funds where over 65% of the investment is in debt, the holding period for taxation has been reduced to over 24 months. These funds will still be taxed according to the investor’s tax slab as either LTCG or STCG.
Capital Gains Tax | Holding Period | Old Rate | New Rate |
Short-Term Capital Gains (STCG) | Less than 36 months | Taxed according to your income tax slab | Taxed according to your income tax slab |
Long-Term Capital Gains (LTCG) | More than 36 months | 10% | 12.50% |
Hybrid Mutual Funds
Short-Term Capital Gains (STCG)
The tax on short-term capital gains depends on the fund’s asset allocation when it comes to hybrid mutual funds. Here is a breakdown of STCG tax rates according to their asset allocation in hybrid funds:
- Equity-Oriented Hybrid Funds (more than 65% in equity): The gains from units sold within 12 months are taxed at 20%.
- Debt-Oriented Hybrid Funds (less than 65% in equity): The gains from units sold within three years are taxed according to your income tax slab.
Long-Term Capital Gains (LTCG)
The capital gains tax on hybrid mutual funds that extend the specified period (12 or 36 months) is known as the long-term capital gain tax. The tax treatment under this condition is as follows:
- Equity-Oriented Hybrid Funds: The gains from units held for over a period of 12 months are taxed at 12.5%. The gains up to Rs. 1.25 lakh are tax-free.
- Debt-Oriented Hybrid Funds: The gains from units held for over a period of 36 months are taxed at 12.5% without indexation benefits. This means the entire gain is taxed at this rate, without adjustment for inflation.
Type of Hybrid Fund | Short-Term Capital Gains (STCG) | Long-Term Capital Gains (LTCG) | Indexation Benefit |
Equity-Oriented Hybrid Funds | 20% for holdings less than 1 year | 12.5% for holdings over 1 year, with gains up to Rs. 1.25 lakh tax-free | Not available |
Debt-Oriented Hybrid Funds | Taxed as per income tax slab for holdings less than 3 years | 12.5% for holdings over 3 years | Not available |
Note: Mutual fund schemes where neither the equity nor debt orientation exceeds 65% will now be classified as long-term investments after 24 months. The previous holding period for these funds was 36 months. These will be taxed at the revised LTCG tax rate of 12.5%.
To Wrap It Up…
In conclusion, Micro Cap Mutual Funds offer investors a unique opportunity to tap into the growth potential of the smallest publicly traded companies. While these funds present the prospect of high returns, they come with increased volatility and risks. Investors considering Micro Cap Mutual Funds should carefully assess their risk tolerance, investment goals, and time horizon.
However, it’s important to do your own research and/or consult a financial advisor before investing.
Most Popular Mutual Funds:
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Frequently Asked Questions (FAQs) on Micro Cap Mutual Funds
Given that micro-cap companies are smaller than even small-cap companies, fund managers tend to favour closed-end micro-cap funds. This strategy serves to control the inflow and outflow of cash, providing asset managers the flexibility to make informed decisions.
It’s advisable to aim for the long haul (5+ years) with micro-caps. Patience is key to riding out volatility and unlocking their high-growth potential.
Micro cap mutual funds hunt for hidden gems: under-the-radar companies with massive growth potential, typically valued between Rs. 150 crores and Rs. 3,500 cr. They spread their bets across diverse sectors to balance risk and unlock high returns.
Only invest in micro-cap funds India if:
1. You have high-risk tolerance & a 5+ year horizon.
2. Your portfolio is already well-diversified.
3. The fund has a skilled manager & solid strategy
Micro cap index funds typically don’t have lock-in periods. You can buy and sell units anytime they are traded during market hours.
Mega-cap companies are the largest companies, whereas micro-cap companies typically have valuations below Rs. 3,500 cr.