Top Small Cap Mutual Funds to Invest in 2024
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Small Cap Mutual Funds are a category of mutual funds that focus on investing in the stocks of small-cap companies. If you’re looking for investment options that offer the potential for high returns and are willing to embrace a degree of risk, small-cap funds might be an intriguing prospect. Therefore, letโs explore the world of small-cap mutual funds, benefits, risks, and how you can fit it into your investment portfolio. Let us begin by learning more about the small cap mutual funds meaning.
What is Small Cap Mutual Funds?
Small Cap equity funds invest in the smallest companies in India. These typically have a smaller market capitalization, representing their total market value, in comparison to large-cap and mid-cap companies. These funds offer investors an opportunity to participate in the growth potential of smaller, emerging companies, which often have untapped potential for significant expansion.
While smallcap stocks can be inherently more volatile, small cap MF can be an attractive choice for those seeking long-term capital appreciation and are willing to accept a higher level of risk in their investment portfolios.
Top 10 Small Cap Mutual Funds in India
To understand small cap mutual funds better, consider reviewing the top small cap mutual funds for investment in 2024.
Smallcap Funds | Fund Size (in Cr)) | Returns (p.a) |
---|---|---|
Quant Small Cap Fund Direct Plan-Growth | โน9,089 | +39.81% |
Nippon India Small Cap Fund | โน37,374 | +33.88% |
HSBC Small Cap Fund | โน11,650 | +29.96% |
Union Small Cap Fund | โน1,103 | +29.47% |
ICICI Prudential Smallcap Fund | โน6,054 | +29.12% |
HDFC Small Cap Fund | โน23,251 | +29.08% |
Franklin India Smaller Companies Fund | โน9,719 | +28.45% |
Invesco India Smallcap Fund | โน2,761 | +28.32% |
Kotak Smallcap Fund | โน12,440 | +28.01% |
Sundaram Small Cap Fund | โน2,653 | +27.88% |
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 best smallcap mutual funds list data is from 25th January, 2024. However, for real-time updates on stock prices and market trends, visit the smallcase stocks collection today!
Overview of Top 10 Small Cap Funds in India
Here is a brief overview on the top mutual funds from our list of small cap mutual funds above:
Quant Small Cap Fund Direct Plan-Growth
Quant Mutual Fund offers the Quant Small Cap Fund Direct Plan-Growth, a Small Cap mutual fund scheme launched on January 1st, 2013. With โน15,664 Crores in assets under management (AUM) as of December 31st, 2023, it has been active for 11 years and 1 month. It is one of the best performing small cap mutual funds on our list!
Nippon India Small Cap Fund
Nippon India Small Cap Fund Direct – Growth, launched on January 1, 2013, is a Small Cap mutual fund scheme managed by Nippon India Mutual Fund. With assets under management (AUM) totaling โน45,894 Crores as of December 31, 2023, it stands as a medium-sized fund in its category. The fund’s expense ratio of 0.73% exceeds the typical charges levied by other Small Cap funds. It is also one of the top small cap funds on our list!
HSBC Small Cap Fund
HSBC Small Cap Fund Direct-Growth is a Small Cap mutual fund by HSBC Mutual Fund, managing assets worth โน13,981 Crores as of December 31, 2023. With a nine-year history, this medium-sized fund charges an expense ratio of 0.68%, similar to its peers. Over the past year, it has yielded returns of 52.02%, with an average annual return of 22.61% since inception. Notably, investments in this fund have doubled approximately every three years. It is one of the top ten small cap mutual funds on our list!
Union Small Cap Fund
Union Mutual Fund introduced the Union Small Cap Fund Direct-Growth scheme on May 20, 2014, making it approximately 9 years and 9 months old. As of December 31, 2023, the fund manages assets worth โน1,349 Crores, positioning it as a relatively small fund within its category. With an expense ratio of 0.87%, it surpasses the typical charges of other Small Cap funds, making it one of the best small cap mutual funds for long term on our list.
ICICI Prudential Smallcap Fund Direct Plan Growth
ICICI Prudential Smallcap Fund Direct Plan-Growth, launched on January 1, 2013, is a Small Cap mutual fund scheme by ICICI Prudential Mutual Fund. With assets under management (AUM) totaling โน7,455 Crores as of December 31, 2023, it falls within the medium-sized range for funds of its category. Sporting an expense ratio of 0.61%, similar to that of other Small Cap funds, it has a track record spanning 11 years and 1 month.
HDFC Small Cap Fund
HDFC Small Cap Fund Direct – Growth is a mutual fund scheme from HDFC Mutual Fund. With 11 years and 1 month of existence, it currently manages assets worth โน28,607 Crores as of December 31st, two thousand twenty-three, positioning itself as a medium-sized fund in its category. Sporting an expense ratio of 0.61%, which aligns closely with industry standards, it offers an accessible option for investors seeking exposure to small-cap stocks.
Franklin India Smaller Companies Fund
Franklin Templeton Mutual Fund offers the Franklin India Smaller Companies Direct Fund-Growth, a Small Cap mutual fund scheme launched on January 1, 2013, and active for 11 years and 1 month. As of December 31, 2023, it manages assets worth โน11,834 Crores, positioning it as a medium-sized fund within its category. With an expense ratio of 0.93%, it exceeds the average cost of similar Small Cap funds, making it one of the best small cap fund for long term.
Invesco India Smallcap Fund
Invesco Mutual Fund offers the Invesco India Smallcap Fund Direct – Growth, a Small Cap mutual fund scheme. Launched on October 10, 2018, it has been operational for five years and four months. As of December 31, 2023, the fund manages assets worth โน3,659 Crores, positioning it as a medium-sized fund within its category. Notably, its expense ratio stands at 0.36%, lower than the typical charges levied by comparable Small Cap funds.
Kotak Smallcap Fund
Kotak Mahindra Mutual Fund offers the Kotak Small Cap Fund Direct-Growth, a Small Cap mutual fund scheme. Launched on January 1st, 2013, it has been operational for over 11 years. As of December 31st, 2023, the fund holds assets under management (AUM) worth โน14,426 Crores, positioning it as a medium-sized fund in its category. With an expense ratio of 0.43%, it charges less than many other Small Cap funds.
Sundaram Small Cap Fund
Sundaram Mutual Fund offers the Sundaram Small Cap Fund Direct-Growth, a Small Cap mutual fund scheme established on January 1, 2013, making it operational for over eleven years. As of December 31, 2023, the fund holds assets worth โน3,063 Crores, positioning it as a medium-sized fund in its category. It maintains an expense ratio of 0.86%, comparatively higher than typical rates for Small Cap funds.
Features of Small Cap Mutual Funds
Here are the features of the best small cap mutual funds.
- High Return Potential: Small cap mutual funds invest in small-cap companies, which have the potential to deliver high returns. However, small cap companies are also more volatile and riskier than large-cap companies.
- Investment Horizon: Small cap mutual funds are suitable for investors with a long-term investment horizon (5 years or more). This is because small-cap companies need time to grow and mature.
- Diversification: Small cap mutual funds can help you to diversify your portfolio. This is because they invest in a variety of small-cap companies from different sectors.
- Liquidity: Small cap mutual funds are generally liquid, which means that you can redeem your units at any time. However, there may be some restrictions on redemption during market volatility.
How Do Small Cap Mutual Funds Work?
According to the current SEBI regulations, Small Cap Equity Funds are required to allocate a minimum of 65% of their assets to the equity stocks of small-cap companies. Small-cap companies encompass all publicly listed firms whose market capitalization falls below that of the 250 largest companies traded on the Indian stock exchanges.
Given that best small cap funds primarily invest in small companies, they have the potential to deliver significantly higher returns to investors. However, it’s essential to note that these funds are also susceptible to a heightened level of volatility, as the performance of small-cap companies can be greatly affected by shifting market conditions. To mitigate the potential impact of this volatility, it is advisable for investors to allocate a relatively modest portion of their portfolio to Small Cap Equity Funds.
Factors to Consider Before Investing in Small Cap Funds
Before small cap investing in the best small cap mutual funds, there are a few factors that you should consider:
- Risk: Small cap funds are riskier than large cap and mid cap funds. This is because small cap companies are more volatile and have a higher chance of failure.
- Return Potential: Small cap funds have the potential to deliver higher returns than large cap and mid cap funds. However, it is important to remember that past performance is not indicative of future results.
- Investment Horizon: Small cap funds are best suited for investors with a long-term investment horizon (5 years or more). This is because small caps companies need time to grow and mature.
- Fund Manager’s Track Record: It is important to choose a small cap fund with a fund manager who has a good track record. This will increase your chances of getting good returns.
- Expense Ratio: The expense ratio is the fee charged by the fund manager. A lower expense ratio will leave you with more money in your pocket.
Who Can Invest in the Best Mutual Fund Small Cap?
Smallcap funds can be suitable for the following range of investors:
- Have a High Risk Tolerance: Smallcap funds can be more volatile, making them ideal for those comfortable with higher investment risks.
- Have a Long-Term Investment Horizon: These funds can be the best for investors with a long-term perspective, allowing them to ride out market ups and downs.
- Seek High Growth Potential: Individuals looking for the potential of significant capital appreciation may benefit from small cap mutual funds.
- Value Diversification: Investors who wish to diversify their portfolios and reduce concentration in larger companies can consider small-cap investments.
How to Select Good Small Cap Mutual Funds to Invest in?
Selecting the right small cap mutual funds is thrilling in the stock market. Here’s how you can find the best ones to invest in:
- Define Your Goals: Start with a clear understanding of your financial objectives. Are you aiming for growth, income, or a combination? This will guide your selection.
- Risk Tolerance: Assess your risk tolerance. Small Cap Funds can be more volatile, so ensure it aligns with your comfort level.
- Performance History: Review the historical performance of the funds you’re considering. While past performance isn’t everything, it provides valuable insights.
- Fund Manager Expertise: Get to know the fund manager. Their experience and track record in managing small-cap investments are crucial.
- Consistency: Look for funds with consistent performance across different market conditions. Funds that weather market storms well are often good choices.
How to Invest in Small Cap Funds?
Investing in good small cap mutual funds can be a straightforward process, if you follow these steps:
- Choose a Small Cap Fund: There are many different small cap funds available, so it is important to do your research and choose a fund that is right for you. You can consider factors such as the fund manager’s track record, the fund’s investment strategy, and the fund’s expense ratio.
- Open a Mutual Fund Account: If you don’t already have a mutual fund account, you will need to open one with a mutual fund distributor or an online investment platform.
- Invest in the Fund: Once you have opened a mutual fund account, you can invest in the small cap fund of your choice. You can invest a lump sum amount or you can start a SIP (Systematic Investment Plan).
- Monitor Your Investment: It is important to monitor your investment regularly and make adjustments as needed. For example, you may need to rebalance your portfolio or switch to a different fund if the fund you are invested in is not performing well.
How are Returns on Smallcap Mutual Funds Calculated?
Returns on Small Cap Mutual Funds are calculated based on the change in the net asset value (NAV) of the fund over a specific period. The NAV represents the per-unit market value of the fund and is determined by the value of the underlying assets (small-cap stocks) minus any liabilities.
Formula:
Returns Percentage = [(Final NAV – Initial NAV) / Initial NAV] * 100
The formula for calculating the Returns Percentage consists of the following components:
- Final NAV: This is the final Net Asset Value of the investment or asset at the end of the specified period.
- Initial NAV: This is the initial Net Asset Value of the investment or asset at the beginning of the specified period.
- Returns Percentage: This is the result of the calculation, representing the percentage change in the value of the investment from the initial value to the final value.
Taxation on Smallcap Mutual Funds as per the Union Budget 2024-25
Smallcap mutual funds are taxed according to their asset allocation and holding period. Being aware of these tax implications is essential for making informed financial decisions. The Union Budget for 2024-25 has made significant changes to the taxation on equity mutual funds. Here we have listed these changes, along with the revised tax rates for equity mutual funds:
Short-Term Capital Gains Tax
Any gains made when holding equity mutual funds for less than 12 months are considered short-term capital gains. The Union Budget 2024-25 increased the tax rate on these gains to 20%. The STCG tax rate was previously 15%.
Long-Term Capital Gains Tax
For equity mutual funds held for over a year, gains are classified as long-term capital gains. The new budget introduces these key changes:
- 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% |
Benefits of Investing in the Best Small Cap Mutual Funds
Investing in the best Small Cap Mutual Funds offers several advantages:
- High Growth Potential: Small-cap stocks can provide substantial growth opportunities, potentially outperforming larger companies in the long run.
- Diversification: These funds help in portfolio diversification, spreading risk across a range of small-cap companies.
- Market Efficiency: Smaller companies may be less followed by analysts, allowing for information-based advantages.
- Higher Returns: Historically, small-cap stocks have shown the potential for higher returns, although they come with increased volatility.
Risks Involved While Investing in Small Cap Funds
While finding the best small cap funds, have a look at the associated challenges.
- High Volatility: Small cap stocks are typically more volatile than large cap stocks, meaning their prices can fluctuate more sharply. This can make small cap funds riskier for investors who cannot tolerate large swings in their portfolio value.
- Low Liquidity: Small cap stocks are generally less liquid than large cap stocks, meaning it can be more difficult to buy and sell them. This can be a problem for investors who need to access their cash quickly.
- Higher Risk of Failure: Small cap companies are more likely to fail than large cap companies. This is because they have less financial resources and are more vulnerable to economic downturns.
- Concentration Risk: Small cap funds typically invest in a smaller number of companies than large cap funds. This means that if one of the companies in the portfolio fails, it can have a significant impact on the fund’s performance.
To Wrap It Up…
In conclusion, small cap mutual funds present an exciting opportunity for investors seeking high growth potential in their portfolios. While these funds come with higher volatility and risks, they can be rewarding over the long term. However, diversifying through small cap MF can enhance a well-rounded investment strategy.
Most Popular Mutual Funds:
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Frequently Asked Questions (FAQs) on Best Small Cap Mutual Funds
The best small cap mutual funds are generally not recommended for a 3-year investment horizon. This is because small cap companies are more volatile and riskier than large-cap companies. Therefore, there is a higher chance of losses in the short term.
Small cap funds are not generally recommended for new investors. This is because new investors may not have the risk tolerance to withstand the volatility of small cap funds. Additionally, new investors may not have the necessary knowledge and experience to choose the right small cap funds.
The returns on small cap mutual funds vary depending on the market conditions. However, small cap funds have the potential to deliver returns than large cap and mid cap funds over the long term.
Best small cap mutual funds can be best suited for investors with a long-term investment horizon (5 years or more). This is because small cap companies need time to grow and mature.
Yes, you can add two small-cap funds to your portfolio. This will help you to diversify your risk and reduce your chances of losses. However, one must consider their risk appetite and investment goals before investing.
The best time to invest in small cap funds is when the market is undervalued. This means that you can buy shares of small cap companies at a lower price. However, it is important to remember that the market is unpredictable, so there is no guarantee of profits.