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Small Cap Mutual Funds: An Introduction to Investing in Small Companies

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Created on
May 11, 2023


What’s Inside

In stock exchanges, the top 250 companies in market capitalisation are the cream of the crop. Most beginners may want to purchase mutual funds with these names on their portfolios. But what about the companies beyond that?

Publicly-listed businesses with lower valuations are termed small-cap companies, and the funds focused on them are small cap funds. But are small cap mutual fund returns profitable in the long run? This blog is your one-stop guide to small-cap funds!

The Investment Structure of Small Cap Mutual Funds

As the name suggests, small cap mutual funds focus on budding businesses. These fund houses direct most of the investor's money into small companies showing signs of growth in the near or immediate future. The aim is to invest early and reap profits when the stocks appreciate.

The primary benefit is that small-cap companies have their shares trading at a lower value compared to mammoths in the top 250. The bull market favours these companies and can help you achieve ground-breaking results and grow wealth.

At the same time, you need a high-risk appetite to handle the volatility of these stocks. Not all companies may respond positively to the bull run, and some may succumb to limited financial resources during bearish trends.

Considerations Before Investing in a Small Cap Fund

Investment into any mutual fund starts with assessing its risk and investment approach, and small cap funds are no different. Here are some top small cap mutual funds to get started:

  • Kotak small cap fund
  • Nippon India small cap fund
  • ICICI Prudential small cap fund
  • Axis small cap fund

However, make it a point to conduct sufficient research before choosing the ideal fund for your needs. You can use the following methods to check the overall performance and viability of a small-cap fund:

  • The risks and returns for the past few months or years
  • Expense ratio incurred. A lower expense ratio equates to lower charges required to maintain your funds.
  • The companies in the portfolio. Diversification is essential to mitigate risks.
  • Sharpe ratio measures the returns of the scheme after adjusting risk. Funds with higher sharper ratios are considered better.

Summing Up

Start your journey into small cap mutual funds with Fi. As a money management platform, Fi offers several investment options. Whether short-term or long-term, investing with a simple swipe of your phone's screen is easy. Fi also offers a Peer-to-Peer investment feature called Jump that helps beat inflation! Jump helps you earn up to 9% p.a on your investment. But if you want to save up for a short-term goal & earn interest on it, select our super-flexible Smart Deposit. If you're looking for higher/stable returns, opt for a Fixed Deposit.

Frequently Asked Questions

What are small cap mutual funds, and how do they differ from other types of mutual funds?

Small-cap mutual funds focus on publicly-listed businesses that fall below the top 250 companies in terms of market capitalisation on stock exchanges. The only difference is that these companies are traded at lower values and may have immense growth opportunities.

What are the benefits and risks of investing in small cap mutual funds, and how can investors manage these risks?

By investing in small-cap funds, you can capitalise on bull runs to increase profits and build wealth. However, you must possess a significant risk appetite since small businesses may not always be able to handle the bearish market and succumb to the pressure. The solution is to diversify mutual fund investments to mitigate risks.

How can investors analyse and select small cap mutual funds to invest in, and what factors should they consider?

Consider the following elements before investing in a small-cap fund:

  • The past returns and associated risks
  • Performance as compared to similar mutual funds
  • The number of companies and the growth opportunity of each
  • Sharpe ratio to understand the returns after adjusting for risk

How can investors maximise their returns when investing in small cap mutual funds, and what strategies should they use?

The best way to increase your chances of maximising returns is to commit to SIPs. With regular payments, you can average the cost in case of falling value and reap the profits during bull runs. Plus, diversify your mutual fund investments to avoid depending on a single fund house.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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