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%  

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. You can consult a Cube Wealth Coach or Download the Cube Wealth app.

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. You can consult a Cube Wealth Coach or Download the Cube Wealth app.

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. To learn more, click here.  

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.

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. Watch this video to know more. 

1. Are there tax implications when investing in small-cap mutual funds?

Ans. Yes, there can be tax implications, including capital gains taxes on profits. The tax treatment can vary depending on your country of residence and the type of account (e.g., taxable or tax-advantaged). Consult a tax professional for guidance.

2. Is it a good idea to seek guidance from a financial advisor or investment expert before  venturing into small-cap mutual fund investments?

Ans. This is particularly recommended if you are new to investing or require assistance in choosing the most suitable small-cap mutual funds that match your financial objectives and risk tolerance.

3. What is the minimum capital needed to invest in small-cap mutual funds?

Ans. The minimum investment amount can fluctuate depending on the mutual fund in question. Certain funds may have modest minimum requirements, while others may necessitate a more substantial initial investment. It is essential to verify the precise prerequisites of the particular fund you are considering.

4. Are small-cap mutual funds appropriate for long-term or short-term investment horizons?

Ans. Small-cap mutual funds can serve the needs of both long-term and short-term investors. Nonetheless, they are frequently advised for long-term investors who possess the capacity to withstand market volatility and capitalize on the growth potential of small-cap stocks.

Conclusion 

Selecting the best small-cap mutual funds requires thorough research, consideration of your investment goals, risk tolerance, and time horizon, as well as evaluating factors such as fund performance, expense ratios, and the fund manager's track record. Diversification and a long-term investment horizon are essential principles when investing in small-cap funds to manage risk effectively.

‍

Other Posts You May Like: