Top Small Cap Mutual Funds: Small-cap mutual funds provide a perfect mix of high returns with relatively lesser risk to stock market volatility. Given their high growth potential, small-cap stocks have delivered significant returns in the past few months and have outperformed mid-cap and large-cap stocks.
Nifty Smallcap 250 emerged as the ultimate outperformer with a growth of 5.73% in June 2025 and 17.83% during the past 3 months. Followed by Nifty Midcap 150 with growth of 4.09% in June 2025 & 15.00% in the last 3 months, according to a Motilal Oswal analysis. The index gave around 4% return for a one-year duration, against Nifty 50, which grew by 6.27% and Nifty Midcap 50, which grew around 5.55% during the same period.
For investors who are willing to invest in the small cap stocks but hesitate because of their high volatility and significant market risk, small cap mutual funds emerge as a relatively safer options. Small cap mutual funds offer a wide range of option for risk-averse investors to diversify their portfolio by bringing a balanced exposure to these funds.
What Are Small Cap Mutual Funds?
To understand the term, let’s start with small-cap stocks. According to Securities and Exchange Board of India (SEBI), small-cap stocks represent companies which have relatively low market capitalisation on stock exchanges and are ranked 251st and below.
These companies often operate in niche sectors or are in early growth stages, presenting significant potential for capital appreciation. However, the chance of higher returns comes with increased risk and market volatility.
Small Cap mutual fund schemes are run by mutual fund houses where they pool money from multiple investors to invest in different small cap stocks. The mutual fund investment strategy is formed by a fund manager, who is a subject matter expert and keeps adjusting the investment proportion in small cap stocks based on the stock market situation and economic conditions.
Top 5 Small Cap Mutual Fund Schemes
According to the data available on Association of Mutual Funds in India (AMFI) as on July 31, here are the top small cap mutual fund schemes which have offered up to 40% returns in five years of investment.
| Scheme Name | Latest NAV (₹) Direct | 5-Year Return (%) Regular | 5-Year Return (%) Direct | 5-Year Return (%) Benchmark |
|---|---|---|---|---|
| Quant Small Cap Fund | 278.8347 | 38.38 | 40.17 | 32.74 |
| Nippon India Small Cap Fund | 189.8816 | 36.13 | 37.28 | 32.74 |
| Bandhan Small Cap Fund | 51.0530 | 34.52 | 35.86 | 32.09 |
| HSBC Small Cap Fund | 90.9977 | 33.80 | 35.21 | 32.74 |
| HDFC Small Cap Fund | 160.7130 | 33.12 | 34.37 | 32.09 |
Small Cap Mutual Fund Schemes: What Are The Benefits And Risks?
Investors with a high-risk appetite and long-term goals may find small-cap funds appealing. They can offer substantial returns if the companies grow into mid or large-cap firms. However, these funds are more prone to market fluctuations, economic downturns, and liquidity challenges.
The stocks in small-cap funds often experience sharp price changes. This makes them highly volatile and sensitive to broader market conditions.
Small Cap Mutual Funds: A Step For Diversification
To mitigate risks, these funds usually invest in a diversified portfolio of small-cap stocks. This approach helps balance potential losses from underperforming stocks with gains from better-performing ones.
Given their inherent volatility, a minimum investment horizon of 5-7 years is advisable. This duration allows investors to weather short-term market fluctuations and benefit from long-term growth trends.
Small Cap Mutual Fund Schemes: What Are The Pros and Cons?
Small Cap mutual fund schemes offer better return potential compared to mid cap or large cap mutual funds. That is because of high growth potential of these small cap stocks. However, these stocks are volatile and fluctuate significantly compared to mid cap and small cap stocks.
Incorporating small-cap mutual funds into a diversified portfolio can be beneficial for those seeking growth potential in emerging businesses. Yet, due to their volatile nature, aligning these investments with your risk tolerance, financial goals, and time horizon is crucial.
