Small-cap mutual funds are a popular investment option for investors looking to diversify their portfolios and invest in companies with high growth potential.
These funds invest primarily in small-cap companies, which are typically defined as those with a market capitalization of less than Rs. 500 crores. While small-cap companies have higher growth potential than their larger counterparts, they also come with higher risks. Hence, it is crucial to invest in the right small-cap mutual funds that have a track record of delivering consistent returns over the long term.
What are mutual funds?
Mutual funds are a type of investment vehicle that pools money from many investors to purchase a portfolio of stocks, bonds, or other securities. These funds are managed by professional fund managers who use the pooled money to invest in a variety of assets with the aim of generating returns for the investors.
When an investor buys units or shares of a mutual fund, they are effectively buying a small portion of the overall portfolio of assets held by the fund. The value of these units or shares changes based on the performance of the underlying assets held by the fund. If the value of the assets held by the fund increases, the value of the units or shares held by the investor also increases.
Mutual funds offer investors a number of advantages, including:
- Professional Management: Mutual funds are managed by experienced investment professionals who have the knowledge and expertise to make informed investment decisions on behalf of the investors.
- Diversification: By investing in a mutual fund, investors gain exposure to a diversified portfolio of assets, which helps to spread out the risk and reduce the impact of any single investment.
- Liquidity: Mutual funds are generally highly liquid, meaning that investors can easily buy or sell their units or shares on any business day.
- Low Minimum Investment: Many mutual funds have low minimum investment requirements, making them accessible to a wide range of investors.
- Transparency: Mutual funds are required to disclose their holdings and other important information to investors on a regular basis, which provides investors with a high level of transparency.
Here are the 10 best small-cap mutual funds in India for 2023 based on their past performance, portfolio quality, and other important parameters:
SBI Small Cap Fund
The SBI Small Cap Fund is an open-ended equity scheme that primarily invests in small-cap companies. The fund has a 5-year annualized return of around 31.89% (as of January 2023) and has consistently outperformed its benchmark index. The fund’s portfolio is well-diversified across various sectors, with a focus on companies with strong growth potential.
HDFC Small Cap Fund
The HDFC Small Cap Fund is an open-ended equity scheme that primarily invests in small-cap companies. The fund has a 5-year annualized return of around 25.45% (as of January 2023) and has consistently outperformed its benchmark index. The fund’s portfolio is well-diversified across various sectors, with a focus on companies with strong growth potential.
Axis Small Cap Fund
The Axis Small Cap Fund is an open-ended equity scheme that primarily invests in small-cap companies. The fund has a 5-year annualized return of around 24.88% (as of January 2023) and has consistently outperformed its benchmark index. The fund’s portfolio is well-diversified across various sectors, with a focus on companies with strong growth potential.
Franklin India Smaller Companies Fund
The Franklin India Smaller Companies Fund is an open-ended equity scheme that primarily invests in small-cap companies. The fund has a 5-year annualized return of around 24.24% (as of January 2023) and has consistently outperformed its benchmark index. The fund’s portfolio is well-diversified across various sectors, with a focus on companies with strong growth potential.
Kotak Small Cap Fund
The Kotak Small Cap Fund is an open-ended equity scheme that primarily invests in small-cap companies. The fund has a 5-year annualized return of around 23.39% (as of January 2023) and has consistently outperformed its benchmark index. The fund’s portfolio is well-diversified across various sectors, with a focus on companies with strong growth potential.
Nippon India Small Cap Fund
The Nippon India Small Cap Fund is an open-ended equity scheme that primarily invests in small-cap companies. The fund has a 5-year annualized return of around 21.26% (as of January 2023) and has consistently outperformed its benchmark index. The fund’s portfolio is well-diversified across various sectors, with a focus on companies with strong growth potential.
DSP Small Cap Fund
The DSP Small Cap Fund is an open-ended equity scheme that primarily invests in small-cap companies. The fund has a 5-year annualized return of around 21.19% (as of January 2023) and has consistently outperformed its benchmark index. The fund’s portfolio is well-diversified across various sectors, with a focus on companies with strong growth potential.
Sundaram Small Cap Fund
The Sundaram Small Cap Fund is an open-ended equity scheme that primarily invests in small-cap companies. The fund has a 5-year annualized return of around 19.98% (as of January 2023) and has consistently outperformed its benchmark index. The fund’s portfolio is well-diversified across various sectors, with a focus on companies with strong growth potential.
L&T Emerging Businesses Fund
The L&T Emerging Businesses Fund is an open-ended equity scheme that primarily invests in small-cap companies. The fund has a 5-year annualized return of around 19.62% (as of January 2023) and has consistently outperformed its benchmark index. The fund’s portfolio is well-diversified across various sectors, with a focus on companies with strong growth potential.
ICICI Prudential Smallcap Fund
The ICICI Prudential Smallcap Fund is an open-ended equity scheme that primarily invests in small-cap companies. The fund has a 5-year annualized return of around 18.61% (as of January 2023) and has consistently outperformed its benchmark index. The fund’s portfolio is well-diversified across various sectors, with a focus on companies with strong growth potential.
It is important to note that small-cap mutual funds come with higher risk due to the volatile nature of small-cap companies. However, they also offer higher growth potential in the long term. Investors should consider their risk appetite and investment goals before investing in small-cap mutual funds.
Factors to Consider While Investing in Small-Cap Mutual Funds
- Past Performance: While past performance is not a guarantee of future returns, it is still an important factor to consider while selecting a small-cap mutual fund. Investors should look for funds that have consistently outperformed their benchmark index over the long term.
- Fund Manager: The fund manager plays a crucial role in the performance of a mutual fund. Investors should look for funds managed by experienced and competent fund managers who have a track record of delivering consistent returns.
- Expense Ratio: The expense ratio is the fee charged by the mutual fund for managing the portfolio. Investors should look for funds with a lower expense ratio as it can have a significant impact on the returns over the long term.
- Portfolio Quality: The quality of the portfolio is an important factor to consider while selecting a mutual fund. Investors should look for funds that have a well-diversified portfolio across various sectors and have a focus on companies with strong growth potential.
Conclusion
Small-cap mutual funds can offer higher growth potential in the long term, but they come with higher risks. Investors should consider their risk appetite and investment goals before investing in small-cap mutual funds. The 10 best small-cap mutual funds in India for 2023 mentioned above have a track record of delivering consistent returns over the long term and have a well-diversified portfolio across various sectors. However, investors should conduct their due diligence and consult a financial advisor before investing in any mutual fund.