5 Best Small Cap Mutual Funds to Invest in 2023 - Top Performing Small Cap Mutual Funds in India

​​Small Cap Mutual Funds are high risk - high return equity mutual funds. Investment in Small Cap mutual funds is associated with higher risk levels compared to mid-cap and large-cap funds as they invest in lesser-known and under-researched companies. Over the short and medium Small Cap Funds, they can witness intense volatility and higher downside, particularly during bearish market phases. Nonetheless, they can generate significant alpha and even outperform most other sub-categories of equity-oriented mutual funds over the long term.

We at  PersonalFN have shortlisted the five best Small Cap Mutual Funds to invest in 2023.  But before we reveal our list of best Small Cap Funds, let us take a look at the basics of the category.

*This video is for information purposes only and is not meant to influence your investment decisions.
   

What are Small Cap Mutual Funds?

Small-cap funds are equity-oriented mutual funds mandated to invest at least 65% of their assets in equity and equity-related instruments of small-cap companies. SEBI defines small-cap stocks as companies ranking beyond 250 in terms of full market capitalisation. Generally, these companies have a market cap of less than Rs 5,000 crore.

Examples of Small Cap Mutual Funds in India

AUM data as of November 30, 2022
(Source: ACE MF)
 

What are the advantages of investing in Small Cap Mutual Funds?

Did you know that Asian Paints, Bajaj Finance, Titan Company, and Britannia Industries, among many other large-cap names of today were little-known small-cap stocks until around a decade ago? Small companies that prove their mettle even in the face of adversities have the potential to become big corporations in the future. These companies have the potential to climb up the leadership ladder to become mid-caps or even large-caps of tomorrow. Thus, Small Cap Mutual Funds can potentially generate very high returns and give a boost to your equity portfolio.

Favourite stocks of Small Cap Mutual Funds

Graph 1
Data as of November 30, 2022
(Source: ACE MF)
 

Why invest only in the best Small Cap Mutual Funds?

Though Small-cap companies have high return potential, there are various risks associated with them. These companies have smaller operations with limited access to various resources. At times, if there is a constraint on resources, they may face risk to survival in case of economic downturn.

Further, there is liquidity risk associated with them as the limited number of shares makes it difficult for investors to buy and sell as per their wish. That said, a strong business helmed by a well-built management team, along with the availability of stock at a reasonable price, can make it a very attractive investment.

Be advised that for every high-potential small-cap, there is a long list of stocks that can turn out to be wealth destroyers. Therefore, it will be prudent to invest only in the best Small-cap Funds that focus on picking high growth-potential quality stocks available at reasonable valuations.

Not all Small Cap Funds have the potential to create high returns

5-yr returns (CAGR %)
Top performing scheme 25.06
Worst performing scheme 6.07
Category average 14.76
Nifty Smallcap 250 - TRI 8.95
Past performance is not an indicator of future returns
Data as of December 14, 2022. Direct Plan-Growth option considered
(Source: ACE MF)
 

Who should invest in Small Cap Mutual Funds?

If you are looking to uncover the potential of these multi-baggers of tomorrow while they are still relatively undiscovered, consider investing in Small Cap Funds. However, remember that Small-cap funds are placed on the higher end of the risk-return spectrum, just a notch below sector and thematic funds. So, small-cap funds are a very high-risk-high-return investment proposition because the stocks of such companies are highly volatile. Therefore, invest in Small Cap Funds only if you have a very high risk appetite to handle sharp market volatility and an investment horizon of at least 7-10 years.

How much should you allocate in Small Cap Mutual Funds?

With significant allocation to stocks in the lower market cap, Small Cap Funds are highly likely to be impacted by economic turmoil such as recession. Accordingly, Small Cap Funds should only form part of the 'Satellite' portfolio of your equity mutual fund portfolio. Consider limiting Small Cap Fund exposure to 10-15% of your equity mutual fund portfolio.

5 Best Small Cap Mutual Funds to Invest in 2023 – Top Performing Small Cap Mutual Funds in India
(Image source: freepik.com)
 

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Which are the best Small Cap Mutual Funds to invest in 2023?

As mentioned earlier, not all Small Cap Funds have the potential to generate significant wealth for their investors. That is why we at PersonalFN have identified 5 best Small Cap Mutual Funds to invest in 2023 using our proprietary SMART Score Matrix. We select mutual funds on the basis of 5 variable tests, viz. Systems and Process, Market cycle performance, Asset management style, Risk-reward ratios and Performance Track Record. So, each fund recommended by PersonalFN is identified through our stringent process, where they are tested on these five essential parameters.

This matrix is specially developed by the in-house research team at PersonalFN, and we believe it's one of the finest and most reliable fund selection methodologies in the industry today.

Why? Because it has shown successful results over time! Identifying Long-Term Players Has Been Our Specialty Always!

Let us finally take a look at the best small-cap equity mutual funds to invest in 2023.

Scheme Name Returns
Absolute (%)
1 Year 3 Years 5 Years 7 Years
SBI Small Cap Fund 13.24 32.01 16.01 21.83
Canara Rob Small Cap Fund 11.32 41.75 -- --
Kotak Small Cap Fund 0.87 34.57 17.62 20.06
Nippon India Small Cap Fund 13.16 37.71 17.56 21.46
Quant Small Cap Fund 12.61 57.54 25.06 19.87
Past performance is not an indicator of future returns
Data as of December 14, 2022. Direct Plan-Growth option considered
(Source: ACE MF)
 

Best Small Cap Mutual Fund to Invest in 2023 #1: SBI Small Cap Fund

Launched in September 2009, SBI Small Cap Fund is the second-largest scheme in the Small-cap fund category. The fund looks to invest in high-growth-oriented multi-bagger stocks of small-sized companies but is cautious about the price it is willing to pay for the stock. It also hunts for temporarily beaten-down stocks available at cheap valuations and does not resist from taking a few short-term calls. Over the longer time period of 5 years and 7 years, the fund outpaced its benchmark by a noticeable margin of around 7-8 percentage points.

Fund Snapshot: SBI Small Cap Fund

Past performance is not an indicator of future returns
AUM and Portfolio data are as of November 30, 2022
NAV as of December 14, 2022. Expense ratio as of November 30, 2022. Direct Plan - Growth Option considered
Returns data as of December 14, 2022. Regular Plan - Growth Option considered
(Source: ACE MF)
 

SBI Small Cap Fund is one of the well-managed schemes in the small-cap fund category that has built a solid track record for itself and has rewarded its investors well since its inception. It has a proven track record of timely identifying fundamentally sound stocks in the small-cap space that have turned into multi-baggers and have helped the fund regain its spot among top category performers.

Click here to read our detailed coverage on the features and performance of SBI Small Cap Fund.

(Note: Owing to the large corpus, SBI Small Cap Fund has suspended fresh subscriptions in the scheme via the lump sum mode since September 2020. Furthermore, fresh registrations via the SIP mode are capped at Rs 25,000 per month per PAN since February 2021.)

Best Small Cap Mutual Fund to Invest in 2023 #2: Kotak Small Cap Fund

Kotak Small Cap Fund aims to invest in small-sized companies having the potential to grow in size and become future market leaders. Launched as a Mid Cap Fund in February 2005, Kotak Small Cap Fund holds a small-cap biased portfolio along with significant exposure to mid-caps. The fund follows a buy-and-hold investment strategy to benefit from the long-term growth potential of small-sized companies. The fund manager has proven his ability to timely identify and capture available opportunities in the small-cap space and create significant wealth for long-term investors in the fund.

Fund Snapshot: Kotak Small Cap Fund

Past performance is not an indicator of future returns
AUM and Portfolio data are as of November 30, 2022
NAV as of December 14, 2022. Expense ratio as of November 30, 2022. Direct Plan - Growth Option considered
Returns data as of December 14, 2022. Regular Plan - Growth Option considered
(Source: ACE MF)
 

Kotak Small Cap Fund currently ranks among the top quartile performers in the small-cap category over the 5-year and 7-year time frames. The fund's focus on identifying quality stocks in the small-cap space and holding it with a long-term view has worked in its favour. More importantly, the fund has delivered in terms of generating superior risk-adjusted returns for investors.

Best Small Cap Mutual Fund to Invest in 2023 #3: Nippon India Small Cap Fund

Having a corpus of Rs 23,765 crore, Nippon India Small Cap Fund is currently the largest scheme in the Small Cap Fund category. Since its inception in September 2010, Nippon India Small Cap Fund has done well across market phases and built an impressive track record of superior performance. The fund currently stands among the top quartile performers in the category across time frames.

Fund Snapshot: Nippon India Small Cap Fund

Past performance is not an indicator of future returns
AUM and Portfolio data are as of November 30, 2022
NAV as of December 14, 2022. Expense ratio as of November 30, 2022. Direct Plan - Growth Option considered
Returns data as of December 14, 2022. Regular Plan - Growth Option considered
(Source: ACE MF)
 

The fund holds a large number of stocks (around 150 stocks) in the portfolio and limits the exposure to individual stocks to well under 5% in order to reduce the high downside risk associated with small-sized companies. Its focus on fundamentally sound stocks available at a reasonable margin of safety has helped it minimise the downside risk during bearish market phases. Meanwhile, the focus on fundamentally sound stocks having high potential stocks and holding them with a long-term view has enabled it to do well during upside markets.

Click here to read our detailed coverage on the features and performance of Nippon India Small Cap Fund.

Best Small Cap Mutual Fund to Invest in 2023 #4: Quant Small Cap Fund

Incepted in January 2013, Quant Small Cap Fund is a small-sized scheme in the Small Cap Fund category that follows aggressive investment strategies. Quant Small Cap Fund follows an active investment approach whereby it constantly hunts for attractive opportunities, which makes it sector and benchmark agnostic. The fund's small corpus gives it the advantage of easy liquidation and the ability to quickly shift allocation in line with dynamic market conditions.

Fund Snapshot: Quant India Small Cap Fund

Past performance is not an indicator of future returns
AUM and Portfolio data are as of November 30, 2022
NAV and Returns are as of December 14, 2022. Expense ratio as of November 30, 2022. Direct Plan - Growth Option considered
Returns data as of December 14, 2022. Regular Plan - Growth Option considered
(Source: ACE MF)
 

Despite being small in size, Quant Small Cap Fund has registered extraordinary performance in recent years and handsomely rewarded its investors. The volatility registered by the fund is higher than the category average as well as the benchmark. Nonetheless, the remarkable returns generated by the fund have helped it score high on risk-reward parameters. Quant Small Cap Fund is quick in its approach to shift allocation between market caps and sectors depending on the market conditions which has helped it to generate significant alpha for investors in the fund.

Click here to read our detailed coverage on the features and performance of Quant Small Cap Fund.

Best Small Cap Mutual Fund to Invest in 2023 #5: Canara Robeco Small Cap Fund

Incepted in February 2019, Canara Robeco Small Cap Fund is one of the latest entrants in the Small Cap Fund category. The fund aims to maintain a well-diversified portfolio at all times. It aims to invest in undervalued businesses with consistent earnings, strong business models, and competent management. While identifying attractive opportunities, Canara Robeco Small Cap Fund does not comprise on safety and lays high emphasis on risk management.

Fund Snapshot: Canara Robeco Small Cap Fund

Past performance is not an indicator of future returns
AUM and Portfolio data are as of November 30, 2022
NAV and Returns are as of December 14, 2022. Expense ratio as of November 30, 2022. Direct Plan - Growth Option considered
Returns data as of December 14, 2022. Regular Plan - Growth Option considered
(Source: ACE MF)
 

Despite having a short term track record of nearly four years, the fund has shown great potential and has clearly outpaced the benchmark and most of its peers. The fund not only limited the downside risk during the market crash of 2020 but also stood among the top performers in the category in the ensuing bull phase. This has helped it to generate substantial alpha over the benchmark and its prominent peers. Canara Robeco Small Cap Fund achieved this feat at a reasonable risk level, thus rewarding investors with superior risk-adjusted returns.

How are Small Cap Mutual Funds taxed?

Small Cap Mutual Funds are equity-oriented mutual funds and hence they follow equity taxation. From a tax perspective, the short-term holding period for Small Cap Mutual Funds is 12 months. So, if you sell your Small Cap Mutual Fund units before 12 months, you pay short-term capital gains (STCG) tax of flat 15%.

On the other hand, if you sell your Small Cap Fund units after completing one year, you pay long-term capital gains tax of 10% with indexation, but only if your gains exceed Rs 1 Lakh in a financial year. If your long-term gains are below Rs 1 Lakh and you redeem after completing one year, then you do not have to pay any tax on these gains.

How to invest in the best Small Cap Mutual Funds?

Considering the volatile and uncertain nature of equity markets, take the Systematic Investment Plan (SIP) route when you invest in the best Small Cap Mutual Funds. Click here to read about the benefits of investing in mutual funds via SIP.

You can also consider opting for the Direct plan option of mutual funds to enhance the portfolio returns, as the expense ratio of Direct plans is around 50-100 bps lower than that of the Regular plan.

This completes our list of the 5 best Small Cap Funds to invest in 2023.

 

Warm Regards,
Divya Grover
Research Analyst

 

Disclaimer:

The schemes mentioned above are selected on the basis of PersonalFN's SMART Score, which considers various quantitative and qualitative parameters to arrive at fundamentally sound and reliable mutual fund schemes. These schemes may or may not be suitable for you. Hence, it is necessary that you understand your risk appetite and suitability well in case you consider investing in any of these funds. If unsure, do consult your SEBI registered investment advisor.  

This does not constitute investment advice. Returns mentioned herein are in no way a guarantee or promise of future returns. Mutual Fund Investments are subject to market risks, read all scheme-related documents carefully before investing.