Best Small Cap Mutual Funds 2021 – Top Small Cap Funds

Best Small Cap Mutual Funds

Best Small Cap Mutual Fund for 2021 – Top Small Cap Fund 

Scheme name 1-Year Return 3-Year Return 5-Year Return NAV Expense Ratio Turnover ratio
SBI Small Cap Fund Regular Growth 31.93% 8.33% 19.40% Rs. 75.4648 1.92% 60.00%
Kotak Small Cap Fund – Growth  35.66% 10.70% 17.33% Rs.108.153 2.11% 20.57%

*This is simply the list of best small cap funds. This is not investment advice.

What are Best Small Cap Mutual Funds?

Small Cap mutual funds invest in small cap companies. Small cap companies are 250th onwards in terms of market capitalisation.

Small cap funds have the potential to deliver superior returns. But small cap funds are also incredibly volatile. They are riskier than large cap and mid cap funds.

The Securities and Exchange Board of India, SEBI defines small cap mutual funds as ‘Funds that primarily invest in the companies which have a market capitalisation of less than 500 Crores’.

As per SEBI, a small-cap mutual fund must invest 80% of its corpus in stocks of small-cap companies. The remaining 20% can be invested in large cap or midcap companies.

While small cap funds generate superior returns, even the slightest volatility in the market can have a huge impact on the valuation of small cap companies.

What Are the Advantages of Investing in The Best Small Cap Funds?

  • Small cap funds have extremely high growth potential.
  • Small cap funds help in portfolio diversification.
  • Small cap funds tend to outperform the large cap and mid cap funds in a bull run. It gives you an opportunity to grow your investments quickly and earn superior returns.

Who Should Invest in Small Cap Mutual Funds?

Small cap funds have a very high return-risk ratio. It is possible that your small cap fund may face frequent ups and downs. Such volatility is difficult for low risk investors.

Hence only investors with ‘very high’ risk profile should invest in small cap funds.

If you are an aggressive investor and want to build long-term wealth, then small cap mutual funds would be ideal for you.

Things to Consider Before Investing in the Best Small Cap Mutual Funds

Before investing in small cap funds, investors should consider the following:

1. Investment objective: Before you invest in small cap funds, you must do goal based financial planning. When you set SMART financial goals, you commit to long term investing.

2. Long-term investment: Small Cap stocks are highly affected by market movements. When markets fall, small cap funds are impacted the most.Hence, it is important to have a long-term investment horizon while investing in Small-Cap Funds. This gives the fund sufficient time to generate superior returns.

3. Patience: While investing in small-caps, it is important to remain patient. Your portfolio will not double in a year. At times, you might even face a loss. It might take a minimum period of 3-4 years for the fund to generate good returns. Therefore, patience is a must when investing in small cap funds.

4. Risk appetite: Investors should always analyse their risk appetite before making an investment decision. Higher risk leads to higher returns. Only investors with a high-risk tolerance should invest in small cap funds.

How are Small Cap Mutual Funds Taxed?

The profit from your small cap fund is known as capital gains. These capital gains are taxed on the basis of your holding period.

1. Short term capital gains: Capital gains on holding period up to one year are short-term capital gains (STCG). The tax imposed on Short term capital gains is 15%.

2. Long-term capital gains: Capital gains on holding period of more than one year are long-term capital gains (LTCG). The tax imposed on Long term capital gains is 10% above Rs 1 Lakhs.

How to Select Best Small-cap Mutual Funds?

1. Expense Ratio: Expense ratio is used to calculate the expenses involved in managing & operating a fund. Expense ratio is directly connected to your returns. A higher expense ratio reduces your portfolio returns.

2. Fund Manager: The fund manager has a huge impact on the performance of the fund. Before you invest in any fund, you should conduct an in-depth research on the fund house and the fund manager. You should look out for a fund manager with a strong track record across market ups and downs.

3. Ratings: As the market fluctuates, the valuations of the fund and the margin of safety ratio keeps on changing. Only relying on star ratings is not ideal. You also need to study the fundamentals to understand which small cap fund is worth investing.

4. Portfolio Turnover ratio: The ‘portfolio turnover ratio’ helps you understand how frequently your fund manager buys and sells stocks. Higher the ratio, the more times your portfolio has been churned. The fund managers often churn your portfolio unnecessarily to increase the expense ratio. A very high portfolio turnover ratio will simply increase your costs but not returns.

Final Thoughts

Small cap mutual funds are risky as compared to other investment options. So, to reduce risk it is recommended to diversity your portfolio as per your investment goals.

Ideally, you should invest in small cap funds only if your investment horizon is more than 5-7 years. This gives small cap funds time to grow.

However, selecting the best mutual fund can be daunting. But, RankMF’s proprietary index MosDEX helps you invest in the right small cap fund at the right time.

To know if this is the right time to invest in Mutual Fund and other best small cap funds, open a FREE RankMF account today!

Share this article

About The Author

Leave A Comment?