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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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:
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.
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%.
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.
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.
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.
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.
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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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