Best Micro-Cap Mutual Funds For 2025

Microcap companies are often in the early stages of growth. Successful businesses can experience exponential revenue and profit increases, translating to significant returns for investors. Microcap mutual funds provide exposure to these sectors and companies often overlooked by traditional investment avenues, offering diversification beyond blue-chip and mid-cap investments.

In 2025, microcap mutual funds continue to gain attention from seasoned and new investors alike. With the global economy navigating uncertainties and India's domestic market displaying resilience, the microcap segment has emerged as a promising avenue for wealth creation.

Challenges such as fluctuating energy prices, geopolitical tensions, and rising interest rates in developed economies have made investors turn toward emerging markets like India. Within this context, the microcap segment has shown remarkable resilience, reflecting the entrepreneurial spirit and innovation of India's small businesses.

Note: In my previous article related to microcap mutual funds, I have covered a detailed report on their investment strategy, benefits, risk factors, and suitability. You may consider reading - All You Need To Know About Micro-Cap Mutual Funds in India.

This article delves into the potential opportunities in the microcap space, and whether investors may consider microcap mutual funds as part of their portfolio strategy.

The Role of the Nifty Microcap 250 Index

The Nifty Microcap 250 Index, launched by the National Stock Exchange (NSE), serves as a benchmark for tracking the performance of the microcap segment. Comprising the 251st to 500th largest companies by market capitalization, this index highlights the breadth and depth of India's microcap universe.

The index has delivered impressive annualized returns, outperforming broader indices like Nifty 50 and Nifty Midcap 150. It offers a diverse mix of sectors such as technology, healthcare, consumer goods, and financials. While relatively less liquid than large-cap stocks, the growing interest has improved trading volumes.

The Nifty Microcap 250 Index includes 250 microcap stocks, ensuring a wide representation of small-scale yet high-growth businesses. These companies span a variety of industries, from manufacturing and technology to healthcare and consumer goods.

While individual stock allocations are relatively small to mitigate risk, the holdings often include a mix of niche players with unique product offerings, startups transitioning into growth phases, and smaller firms benefiting from economic tailwinds.

The companies within this index typically represent emerging sectors and high-growth industries, making them ideal for those seeking early-stage investment opportunities.

Do note, that Motilal Oswal Nifty Microcap 250 Index Fund holds the distinction of being the first index fund in India to track the Nifty Microcap 250 Index, opening up an exciting avenue for investors to gain passive exposure to the microcap segment.

Future Outlook for Microcap Segment

The future of the microcap segment in India looks promising, driven by the country's robust economic growth, government initiatives, and increasing investor interest. As India aims to become a USD 10 trillion economy by 2030, the contribution of microcap companies is considered to be pivotal.

With government initiatives like the Make in India 2.0, PLI (Production-Linked Incentives) schemes and a focus on local manufacturing, microcap businesses are poised to grow significantly. Startups focusing on AI, fintech, and green technology are flourishing in the microcap space.

Additionally, rising rural and urban consumption, driven by increased disposable incomes, will create demand for consumer-focused microcap companies, particularly in retail, FMCG, and allied sectors. While challenges like liquidity constraints and market volatility persist, the long-term growth trajectory of microcap companies remains robust.

As these microcap businesses mature and transition into small-cap or mid-cap categories, they are likely to deliver significant returns, making the microcap segment a critical piece in India's economic and market growth story.

Why Investors May Consider Microcap Mutual Funds?

Directly investing in microcap stocks could be highly risky and may not suit every investor, investing through microcap mutual funds is a comparatively risk-averse path.

Microcap funds provide exposure to a segment often overlooked in traditional portfolios. Adding these funds can improve diversification, particularly for investors with a high-risk tolerance. Investing in microcap companies allows investors to participate in their growth stories from an early stage. This early-mover advantage can translate into substantial returns as these companies scale up.

Microcap funds have consistently demonstrated the ability to outperform benchmarks during bull markets. Fund managers with expertise in identifying high-potential companies can generate significant alpha.

India's focus on self-reliance, digitization, and infrastructure development provides a favourable environment for microcap companies to thrive. Despite recent rallies, many microcap stocks are still available at attractive valuations compared to their mid-cap and large-cap counterparts.

Risks to Consider

While microcap mutual funds offer lucrative opportunities, they are not devoid of risks. Microcap stocks are more susceptible to market fluctuations, making their performance unpredictable during bear markets.

The lower trading volumes of microcap stocks can pose liquidity challenges, especially during market downturns. Microcap companies often lack comprehensive financial disclosures, making it challenging to assess their fundamentals.

The success of microcap mutual funds heavily depends on the fund manager's expertise in selecting high-quality stocks.

To avoid the hassle, here we have curated a list of the best microcap mutual funds for 2025. Investors may consider these equity-oriented mutual fund schemes holding a high allocation to microcap stocks.

#1 - Motilal Oswal Focused Fund

The scheme is a concentrated equity fund that follows a unique investment approach and focuses on investing in a limited portfolio of high-conviction stocks, aiming to achieve higher returns by identifying companies with significant growth potential.

The fund's strategy revolves around investing in stocks that are expected to outperform over the long term, often through thorough fundamental analysis, in-depth research, and a strong understanding of the sectors and businesses in which the fund invests.

While the Motilal Oswal Focused Fund may not primarily be a microcap fund, it does hold positions in stocks across different market caps, including some microcap stocks, depending on the fund manager's conviction in the growth potential of these smaller companies.

As of December 31, 2024, among its microcap holding the fund has a high allocation of 10.88% to Religare Enterprises Ltd. which is a diversified financial services company based in India and a prominent player in the microcap space.

• Religare Enterprises Ltd. The company is primarily involved in providing financial services, including wealth management, retail broking, and insurance, with a growing footprint in the financial services sector. Religare's position in the microcap market signifies its strategy of tapping into smaller yet promising businesses, often under-researched but capable of high growth potential.

Such exposure reflects the fund's strategy of looking beyond the larger, established companies to find emerging players that could become market leaders in the future.

#2 - Motilal Oswal Manufacturing Fund

Launched on August 08, 2024, the scheme is new in the market and aims to achieve long-term capital appreciation by focusing on sectors such as industrials, consumer durables, and related industries.

The fund has allocated approximately 97.63% of its investments in domestic equities, with 10.95% in large-cap stocks, 10.47% in mid-cap stocks, and the remaining in small-cap and microcap stocks. While the fund includes robust business across market caps within its portfolio, the specific allocation to microcap stocks is relatively limited compared to its overall holdings.

Among its top microcap holdings, Zen Technologies Ltd. and PG Electroplast Ltd. are noteworthy, with allocations of approximately 5.17% and 4.22%, respectively. These holdings emphasize the fund's commitment to identifying niche players with high growth potential.

• Zen Technologies Ltd. specializes in providing cutting-edge defence training solutions and simulation technologies. As India increasingly prioritizes self-reliance in defence under the "Make in India" initiative, Zen Technologies is well-positioned to benefit from heightened government spending and export opportunities in this sector.

• PG Electroplast Ltd. operates in the electronics manufacturing services (EMS) space, catering to industries like consumer electronics and automotive components. With the ongoing push for localization in the electronics supply chain, the company stands to gain from the rising demand for domestically manufactured goods and components.

These microcap allocations reflect the fund's intent to capture the growth story of emerging companies within the manufacturing domain. By investing in businesses aligned with government initiatives and rising industry trends, the fund aims to deliver long-term value to its investors while offering exposure to high-growth segments of the market.

#3 TRUSTMF Small Cap Fund

Recently launched in November 2024, the scheme aims to generate long-term capital appreciation by investing predominantly in equity and equity-related securities of small-cap companies. The fund's strategy revolves around identifying and investing in companies that are smaller in market capitalization but have high growth potential.

These stocks are typically under-researched and less liquid but can deliver significant returns over the long term as they expand their market share. The microcap exposure within the TRUSTMF Small Cap Fund is crucial, the scheme has strategically invested in a range of microcap stocks - PG Electroplast Ltd. (1.59%), Wockhardt Ltd. (2.07%), and Zen Technologies Ltd. (1.74%).

• Wockhardt Ltd. is a significant player in the pharmaceutical and healthcare sector, focusing on research and development of high-quality drugs. As a microcap stock, Wockhardt has attracted attention for its potential to generate substantial growth despite its smaller market capitalization. Wockhardt benefits from a strong pipeline of innovative products and a robust global presence, making it an intriguing investment choice in the small-cap segment.

Overall, the TRUSTMF Small Cap Fund's exposure to microcap stocks demonstrates its growth-oriented approach, focusing on emerging companies that, despite being relatively smaller in scale, offer significant upside potential.

#4 - JM Small Cap Fund

JM Small Cap Fund is a dynamic equity mutual fund that focuses on small-cap and microcap stocks, employing a strategy that aims to capture the growth potential of companies in the early stages of their business life cycle.

The fund's microcap exposure plays a key role in this, as microcap stocks often have higher growth potential compared to their larger counterparts, albeit with increased volatility. JM Small Cap Fund has strategically invested in a mix of microcap stocks with high growth potential, and two such key holdings are Neuland Laboratories Ltd. (2.94%) and PG Electroplast Ltd. (2.63%)

• Neuland Laboratories Ltd. is a leading player in the pharmaceutical industry, specializing in active pharmaceutical ingredients (APIs) and contract research and manufacturing services (CRAMS). The company is well-positioned to capitalize on the growing demand for pharmaceutical products, particularly in the generic and speciality drug segments. Despite being a microcap stock, Neuland's robust focus on high-quality products and its expanding market presence make it an appealing choice for growth-focused investors looking for opportunities in the healthcare sector.

Overall, the fund's microcap exposure reflects a growth-oriented, high-risk strategy with its core in the small-cap space designed for investors with a long-term investment horizon and a tolerance for short-term fluctuations in the market.

#5 - HSBC Small Cap Fund

HSBC Small Cap Fund follows a focused investment strategy that primarily targets small-cap and microcap stocks, which are typically under-researched and under-valued companies with substantial growth potential.

Launched in May 2014, the scheme currently holds an AUM of Rs 17,237.34 crore. The returns generated by the scheme have been impressive over the long term and across various market phases.

Notable holdings within the microcap segment include LMW Ltd. (0.69%), Neuland Laboratories Ltd. (2.36%), PG Electroplast Ltd. (0.52%), and Wockhardt Ltd. (0.61%), each contributing to the fund's exposure to emerging industries and growth opportunities.

• LMW Ltd. is a leading player in the textile machinery sector, primarily serving the domestic and international textile industry. Despite its small market cap, LMW's strong position in a growing sector reflects the fund's approach of targeting companies with solid industry prospects.

The HSBC Small Cap Fund diversifies its microcap exposure across various sectors to reduce the risks associated with any single company or industry, but investors should be aware that the fund's performance is closely tied to the success of the smaller companies in its portfolio.

To Conclude...

The microcap segment in India presents a compelling opportunity for investors looking to capitalize on the potential for substantial growth. While the volatility and risks associated with microcap stocks cannot be ignored, the patient rewards, for long-term investors can be significant.

Microcap mutual funds offer a diversified, managed approach to navigating this high-risk, high-reward space, making them an attractive option for investors with a strong risk appetite.

By keeping a close eye on market developments, understanding the role of indices like the Nifty Microcap 250, and carefully selecting funds based on risk tolerance and financial goals, investors can position themselves to tap into the next phase of India's economic growth.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.