Exploring Opportunities: How to Invest in the Best Small Cap Mutual Funds

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Small-cap mutual funds are capable of offering the highest returns to investors. However, the downside is that this type of mutual fund also carries the highest volatility and risk. Therefore, knowing the basics of investing in small-cap mutual funds is very important. Before we get into that, let’s understand what small-cap mutual funds are. Small-cap mutual funds represent a fund created by investing in companies that rank outside the top 250 stocks in the stock market. Companies listed in the small-cap domain often have room for growth. Serious investors should consider including a few small-cap mutual fund assets in their investment portfolio. To classify as a small-cap mutual fund, the market capitalisation of a fund must be less than Rs 5,000 crore.

How to Choose the Best Small Cap Mutual Funds

Here are some important aspects to consider: 

  • Investment Objectives: If you are an investor looking to maximise returns, have a healthy risk appetite, and are willing to play the long-term game, you can consider investing in a few small-cap mutual funds. Since the small-cap mutual fund market is volatile in the short to medium run, playing a long-term strategy can help generate a healthy average return. Remember to consider and compare the past performances of various small-cap funds against each other to find the one that will benefit you the most. After a thorough analysis, start your SIP investment in small-cap mutual funds.
  • Market Conditions: If the market is performing well, small-cap mutual funds are capable of generating excellent value. Hence, being able to assess market conditions accurately can make these types of mutual funds a big player in your investment portfolio. Small-cap mutual funds can offer returns when the market is performing poorly as well, but there is also a good chance you will suffer losses. 
  • Fund Expenses: Every fund you invest in is attached with costs. This cost is known as a fund’s cost ratio. So, being an investor, you should search for a fund that has a low-cost ratio, as this will improve your profit margin. However, the main thing to consider is the amount of net profit you will retain after expenses.  
  • Taxation: There are two types of tax to be aware of when accessing your capital gains. These are Short-Term Capital Gains (STCG) & Long-Term Capital Gains (LTCG). Assets that are held for longer than a year fall in the LTCG tax bracket. Any capital gains in the equity segment you have earned are subject to STCG if you pull your investment before a year.  

STCG Tax Amount: 15% + Applicable Surcharge + 4% Health & Education Cess

LTCG Tax Amount: 10% without indexation & without foreign currency conversion benefit + Applicable Surcharge + 4% Health & Education

Using an SIP Investment: You can use an SIP to invest smartly and securely in small-cap mutual funds. It helps investors better manage investments and build investing discipline, two key facets for making long-term investments. 

Additional Tips: 

  • Ensure that your investment is not too speculative in nature
  • Small-cap funds perform better when interest rates are low.
  • Small-cap funds are made up of stocks that are not overly diversified, so consider your investment portfolio carefully before coming to a decision

Best Small Cap Mutual Funds

Here is a list of popular small-cap mutual funds that you should be aware of and conduct their research on: 

Fund 1 Year Return 3 Year Returns 5 Year Return
ICICI Prudential Smallcap Fund 24.87% 36.98% 25.00%
Kotak Small Cap Fund 18.43% 34.96% 24.78
HDFC Small Cap Fund 36.62% 39.80% 21.21%
Tata Small Cap Fund 27.42% 38.79%




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