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Best Small-Cap Mutual Funds: Small-Cap Mutual Funds Investments For 2023

We’ve put together a list of the best small-cap mutual funds for 2023 handpicked by a top wealth advisor. Read to know more.

Priya Bansal

Stocks in the Indian market are divided into three categories: small, mid, and large-cap. Companies that have a market capitalization of ₹5,000 crores or lesser are known as small-cap companies. 

There are mutual funds that invest in these small-cap companies. These mutual funds are known as small-cap funds. After a quick refresher, we will reveal the top small cap funds in India for 2023. 

What Is A Small-Cap Mutual Fund?

A small-cap mutual fund is a type of equity fund that primarily invests in small-cap stocks like Brigade Enterprises, Coforge, Galaxy Surfactants, etc. that are ranked 251 or beyond by market capitalization. 

Most of these companies are fairly unknown to the common public since they’re in their early stages. But, being a part of the smallest publicly listed companies in India is not necessarily a bad thing. 

Small-cap companies have high growth potential since they can jump into the mid-cap and large-cap categories in the future. This is precisely what small-cap mutual funds look to take advantage of.

While this growth isn’t guaranteed nor does it happen overnight, investors with a high-risk appetite have been known to add small-cap funds to their long term portfolios. Before adopting any investment strategy, it's advisable to download the Cube Wealth App and consult a Cube Wealth Coach who can provide guidance based on your risk tolerance.

Best Small-Cap Mutual Funds In 2023

When you open a list of small-cap mutual funds in India, you’ll notice that there are too many options. This can be confusing and daunting for even the most experienced investors.

That’s why we work with experts who use their 20+ years of experience to curate the best small cap mutual funds to invest in for 2023. Here’s a sneak peek into that list. 

1. Axis Small Cap Fund

Axis Small Cap Fund has been around since 2013. It holds 63 stocks in its portfolio including the likes of Galaxy Surfactants, Narayana Hrudayalaya, Brigade Enterprises, and others.  

As far as returns go, Axis Small Cap Fund has outperformed the benchmark index consistently over the past 7 years, generating 18.69% returns versus 11.65% by BSE 250 SmallCap TRI in the same period.

  • Fund name: Axis Small Cap Fund
  • Inception: 29-11-2013
  • AUM: ₹9,261 crores
  • 3-year returns: 28.08%
  • 5-year returns: 20.32%
  • Expense ratio: 2.00%

2. ICICI Prudential Smallcap Fund

ICICI Prudential Smallcap Fund has been in the market for 15 years. It holds 52 stocks in its portfolio, including Mahindra Lifespace Developers, INOX Leisure, Cyient, and others.

The small-cap fund has a 10-year history of outperforming the benchmark S&P BSE 250 SmallCap TRI index, generating 16.52% returns versus 12.87% over that period.

  • Fund name: ICICI Prudential Smallcap Fund
  • Inception: 18-10-2007
  • AUM: ₹3,620 crores
  • 3-year returns: 25.87%
  • 5-year returns: 15.25%
  • Expense ratio: 2.15% 

3. Kotak Small Cap Fund

Kotak Small Cap Fund is the oldest mutual fund on the list. It was launched over 17 years ago in 2005. There are 71 stocks in this top small-cap fund’s portfolio including Blue Star, Cyient, and more. 

Like other small-cap funds on this list, Kotak Small Cap Fund has outperformed the benchmark index S&P BSE 250 SmallCap TRI, generating 20.43% versus 12.87% over a ten year period. 

  • Fund name: Kotak Small Cap Fund
  • Inception: 24-02-2005
  • AUM: ₹7,385 crores
  • 3-year returns: 30.08%
  • 5-year returns: 18.52%
  • Expense ratio: 1.95%  

Reasons To Invest In Small-Cap Mutual Funds?

1. Potentially High Returns

The stocks that a small-cap fund invests in have the potential to grow exponentially over time. Each stock is that of a company which is developing and vying to become a mid-cap and large-cap company.

This room for growth is unparalleled and may not be found in stocks from the mid-cap and large-cap categories. That’s why small-cap funds can generate potentially high returns over a long period of time. 

Check out the returns generated by top small cap funds on Cube.

2. Suitable For Long Term Goals

By nature, small-cap funds are known to be volatile over the short term because of the type of stocks they invest in. Small-cap stocks require a fair amount of time to grow into their full potential because

  • Becoming cash flow positive may take time
  • Establishing a loyal consumer base happens over time
  • Identifying a niche/carving a place in an industry takes time 

Notice how time repeats often in the case of small-caps? That’s why they’re generally recommended for the long term, which is 5 years or more in duration. 

3. Diversification

Confining yourself to a single small-cap stock can be risky. But if you’re investing in a small-cap fund, you get access to a basket of small-cap stocks. Here are the top 5 holdings of the best small-cap mutual funds.

This diversification can improve your odds of generating solid returns. At the same time, you don’t need to stress over keeping up with multiple volatile small-cap stocks. A fund manager will do that for you.

Risk Involved In Small-Cap Mutual Fund Investments

1. High Volatility

The stocks that small-cap funds invest in are prone to higher volatility than mid-caps or large-caps. This is in part because small-cap companies are nascent and are figuring out how to become successful.

The other aspect is that of the markets. Stocks are linked to the markets that move based on news, trends, and more. Some are more affected than others by these factors, small-caps being one of them. 

2. Capital Loss

The risk of losing capital is quite real when it comes to investments that are known to be very risky. This isn’t any different for small-cap funds, as their nascent nature requires them to take higher risks. 

That’s why investors can benefit from a service that curates small-cap funds based on multiple factors and at the same time, has a successful track record of delivering the best.  

3. Over/Under Diversification

Let’s face it - there are too many small-cap funds on the market. Most of them contain more or less the same stocks which means investors can run into two issues:

  • Buying too many small-cap funds and in the process, over diversifying and incurring a higher investment cost
  • Buying small-cap funds that have overlapping portfolios of stocks which may not be optimal in terms of achieving goals

If you go back to Cube’s list of top small-cap mutual funds, you’ll see that the top holdings of the funds don’t overlap. Thus, it’s best to rely on an advisor who can handpick small-cap funds for you.

Taxability Of Small-Cap Mutual Funds

Small-cap funds are equity funds and are treated as such for taxation. This means if you hold a small-cap fund for less than a year, you’ll have to pay tax on Short Term Capital Gains (STCG).  STCG is taxed at 15%. 

If you hold the small-cap fund for more than a year, you’ll have to pay tax on Long Term Capital Gains (LTCG). LTCG of up to 1 lakh is tax-free. Over and above, it’s taxed at 10%. 

Things To Consider Before Investing In Small-Cap Mutual Funds

1. Your Risk Appetite

Small-cap funds carry an above average risk. That’s why factors like your age, income, and more will determine whether you can invest in a small-cap fund. However, risk appetites change as other factors change.

If you’re at the tail-end of your career or have retired, investing in small-cap funds may not be ideal. On the flip side, a young investor who can take risks may be able to invest in small-cap funds. 

2. Your Financial Goals

Investing is all about hitting goals that are either purely numbers or buying a house, retiring, etc. You’ll have to evaluate where small-cap funds fit into your financial goals as they are long term assets.

3. Quality & Track Record

After you’ve evaluated your risk appetite and financial goals, it’s time to understand the quality of the small-cap mutual fund, the team behind it, and the AMC offering it. 

Cube’s mutual fund advisor uses multiple factors to determine the quality of small-cap funds. You may also consult a Cube Wealth Coach before investing in any such vehicle. Watch this video to know more. 

Should You Invest In Small-Cap Mutual Funds?

Small-cap funds have the potential to generate lucrative long term returns and give you access to a basket of diverse small-cap stocks. But these factors are not enough to invest in them. 

Your life stage, risk profile, income, and several other factors play a part in determining whether small-cap funds are right for you. We’ve simplified this process with our Perfect Portfolio Builder. 

Download Cube To Know More

Note: Facts & figures are true as of 13-05-2022. None of the information shared here is to be construed as investment advice. Exercise caution when investing in assets like stocks, mutual funds, alternative investments, and others.

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Priya Bansal

Curious about personal finance and all things money. Can either find me reading a book or dancing to a tune.

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