The 2025 Best Small Cap Mutual Funds - A Full Guide
Do you want to invest in high growth Indian mutual funds? Small cap funds are also becoming popular among investors who are willing to get more returns and take calculated risks. The entire article will take you through the best small cap mutual funds of 2025, the management of these funds, their characteristics, strengths and weaknesses, professional opinion and the most frequently asked questions.
What are Small Cap Mutual Funds and Why are they a Trend in 2025?
The main type of companies the small cap mutual funds invest in are those that are ranked below the top 250 in the Indian stock market based on market capitalisation. Such companies tend to have less than INR 5000 crore market capitalization. Small caps enjoy the huge growth potential due to their infancy, but also have a greater volatility.
By 2025, the small cap space is becoming more appealing, with the emphasis on digital transformation, startups, and government programs such as Make in India. Most investors are in quest of the optimal funds to increase wealth in the long-term with increased risks.
Key Features
- Invest in stocks in smaller listed and emerging companies.
- Greater risk and higher potential returns than large and mid cap funds.
- Apposite to long-term investors investing over five years.
- Helmed by expert fund managers, with a guarantee of technical research and portfolio construction.
Pros
- High capital appreciation prospects.
- Several sectors and new areas of exposure.
Cons
- Large volatility particularly in falling markets.
- Unsuitable during downturns in the market.
Did you know?
AMFI reports indicate that retail investment in small cap funds has risen 40 percent compared to the prior year as more Indians invest with the aim of long-term growth.
What Are Some of the Factors You need to consider before investing in small Cap Funds?
In case you want to invest in small cap funds in 2025, you should consider your risk ability as well as your all-time financial targets. Some important considerations to consider here include:
- Investment period - the longer the better.
- Risk profile - are you able to cope with steep inclines and declines?
- Previous experience and performance of fund manager.
- High fees can also devour your returns, which are known as expenses ratios.
- Past performance compared to benchmark and peers.
Moreover, it is important to revise the recent regulatory amendments or SEBI circulars as 2025 could potentially have stricter norms to prevent excessive risk-taking.
Highlights
- Choose funds that have a track record of high returns rather than large returns in the recent past.
- Favor funds that have low turnover, disciplined investment philosophy.
- Liquidity of the check portfolio in case you would have to redeem units in volatile markets.
Pros
- Educated choices can prevent hasty exits on market declines.
- Investor interest is protected by transparency and stringent SEBI guidelines.
Cons
- May needs frequent fund monitoring to perform optimally.
- There is no guarantee of returns, because underlying stocks will be more volatile.
Expert Insight:
Financial advisors recommend starting with SIPs in small cap funds and putting in more money as you get comfortable and get the results.
People also ask
Q: Are small cap funds suitable to novices?
A: Compared to large cap funds, they are more risky but fit best those investors who are comfortable in taking risks and willing to remain invested at least five years.
The 5 Best small cap mutual funds to follow in 2025
The process of choosing the most favourable small cap mutual funds in 2025 is pegged on factors such as returns consistency, AUM (Assets Under Management), track record, and expense ratio. Here are some top contenders:
| Name | Fund | 3 Yr CAGR (%) | AUM (cr) | Expense Ratio (%) | Minimum SIP (Rs) |
|---|---|---|---|---|---|
| Nippon India Small Cap | 26.1 | 36,500 | 0.78 | 100 | |
| SBI Small Cap | 23.9 | 20,700 | 0.79 | 500 | |
| Axis Small Cap | 24.0 | 18,400 | 0.73 | 500 | |
| HDFC Small Cap | 21.7 | 18,900 | 0.89 | 100 | |
| Kotak Small Cap | 20.2 | 14,800 | 0.72 | 500 |
Key Features
- They are all open-ended equity funds that invest in listed small cap stocks.
- Under management of good AMCs having good research teams.
- Offer lump sum and SIP investments.
Pros
- Historically has provided better long run returns as compared to the large and mid cap funds.
- Having a diversified portfolio consisting of 60 or more companies reduces the concentration risk.
Cons
- Short term returns are volatile, particularly when the market is correcting.
- AUM can become too large that it will be difficult to invest fund in small stocks.
Did you know?
ET Wealth research reveals that the best performing small cap funds in 2021 recovered faster than the large cap funds following the pandemic.
People also ask
Q: What is the best small cap fund in India in terms of 5 year returns?
A: Nippon India Small Cap Fund and Axis Small Cap Fund have the highest 5-year CAGR, but always take the most recent factsheets as up to date.
What Does a Small Cap Fund Have in Common with the Rest of the Equity Funds?
In comparing small cap funds to other market funds, such as mid and large cap funds, small caps tend to offer higher returns when the market is on a bullish trend, and also they tend to depreciate during bear markets. Here is a quick comparison:
| Name | 3 Yr CAGR (%) | Volatility | Average Holding Period (Years) | Suitability |
|---|---|---|---|---|
| Small Cap Funds | 22-26 | High | 5+ | Aggressive |
| Mid Cap Funds | 15-19 | Medium | 3-5 | Moderate |
| Large Cap Funds | 11-13 | Low | 3+ | Conservative |
Highlights
- Peak growth to develop greater risk appetite.
- Best returns need a long term disciplined approach.
Pros
- Outperformance in bull runs
- Premier opportunities in upsolar fields.
Cons
- Possible severe falls on corrections or large inflows.
- Small cap indexes are more likely to be subject to operator-driven speculative action.
Expert Insight:
SEBI routinely checks the segregation of stocks by mutual funds. By 2025, a few small cap investments might revise portfolios to stay in line, therefore, review half-yearly disclosures of your fund.
People also ask
Q: Is it better to invest lump sum or SIP to small cap funds now?
A: The reason why experts prefer SIPs to lump sum to average high volatility is unless they are investing after an apparent market cutdown.
What will be the Taxation Rules and Exit Load of the small cap funds in 2025?
Before investing in small cap mutual funds, it is important to know the implications of tax because it has impacts on your net returns. In 2025, the tax regime of the equity-oriented schemes will differ little with the year 2024.
- Above INR 1 lakh and over Long Term Capital Gains (LTCG) after 12 months is subject to tax of 10 percent.
- Capital Gains in less than 12 months are taxed at a rate of 15 percent.
- Any dividends paid are included in the income and taxed according to one of the slabs.
- Exit load Most funds have exit load that ranges between 1 percent and 12 months.
Pros
- Less tax on long term gains than on fixed deposits or debt funds.
- SIPs are taken as long term on first in first out.
Cons
- Trading frequently in one year can be subject to both STCG and exit load.
- The older tax-free benefit is eliminated with dividend taxation.
Highlights
- It is possible that tax regulations may vary on each Union Budget, and therefore cannot be sure of the latest changes annually.
- The exit load is automatically deducted and calculated on redemption through digital investment platforms.
Did you know?
Under the new regulations of SEBI, all mutual fund investors will obtain automated consolidated account statements, and it will be easier to calculate taxes in the assessment year 2025-26.
Investing in Small Cap Mutual Funds in 2025? How to do it?
The key to making right investment choices in small cap funds this year is a disciplined research-driven process. Consider these steps:
- Set goals and anticipated returns online SIP calculators.
- Look at monthly factsheets and seek steadiness in the performance of fund compared with the performance of category and benchmark index.
- Focus on funds run by competent teams that have low turnover.
- Spread a minimum of two or three funds with a small cap to reduce the risk of a single scheme.
Pros
- SIP mode insulates portfolio against market fluctuations.
- Simple tracking on mobile applications and text messages.
Cons
- Pliable and must be patient to overcome anxiety when market lulls.
- Not as an alternative to financial advice when there are doubts.
People also ask
Q: Should we invest in active or passive small cap funds in the year 2025?
A: India as of 2025 The active small cap funds are still outperforming the passive funds, as fund managers can delve into less-traded companies.
TLDR or Quick Recap
- A high-risk but high-growth investment to 2025 is small cap mutual funds.
- Most suitable in long term and aggressive stocks with a time horizon of 5 years or more.
- Best plans are Nippon India, Axis, SBI, HDFC and Kotak Small Cap Funds.
- Invest in SIPs, keep track of fund performance and diversify your risk across several funds.
- Your risk-taking capabilities, your own risk-taking, taxes, and exit loads are all things to be aware of before committing capital.
People also ask most popular questions
Q: What is the best small cap mutual fund to invest in or 2025?
A: Select funds that have stable long-term yield, lower cost ratios, and fund managers as Nippon India Small Cap or Axis Small Cap. Always read the most recent factsheets prior to investing.
Q: What should be amount of investment in small cap funds?
A: Keep it to 10-15 percent of your equity portfolio. Use SIPs more to minimize risk associated with market volatility.
Q: Dividends on small cap funds?
A: Yes, a few issue dividend options, but owing to tax reform, growth options tend to pay off better over years.
Q: Is it possible that I can lose money in small cap funds?
A: Yes, short-term losses can occur because of broader swings in small cap stock prices. It is more likely to make positive returns in 5 years or more.
Q: How often should I take a look at my small cap mutual fund portfolio?
A: Sell every 6 to 12 months, or post-market landmark. It is not advisable to replace funds frequently unless performance has been poor over time.
Q: Which is the best type of exit strategy?
A: Bull run out in a disorganized manner when financial targets are achieved or when a bull run has occurred. Redeem over time to avoid loss of gains caused by abrupt market correction.
Sources
- AMFI India
- SEBI Mutual Fund Guidelines
- Value Research
- ET Wealth, January 2025 Edition
