Small Cap Equity Funds 2025 An In-depth Guide
Equity funds of small cap have gradually become popular with Indian investors who want higher returns. With the Indian economy maturing in 2025, these mutual funds are in the mind of many people to diversify and expand their portfolio. In the case of small cap equities, the investor is able to explore the vibrant Indian small business that has the potential to develop considerably. However, the volatility of these funds, as well as their exclusivity of risks is also common. We shall look at the relevance of small cap equity funds, what to expect and how to make the best of the same.
What Are Small Cap Equity Funds
Small cap equity funds are mainly invested in the listed companies with small market capitalization. SEBI classifies small caps by ranking them in the 251 st and onwards in the Indian context in terms of full market cap. These funds allocate not less than 65 percent of their holdings to small cap stocks.
Small cap businesses in India are common with the emerging sector such as renewable energy, speciality chemicals, fintech, healthtech and deep tech. Their visibility at the national brand level is not yet established, yet their potential at such a fast growth of the business and disruption attracts the attention of the investors. In the 2021 and 2023 bull runs the small cap equity funds registered strong growth and with 2025 in action, investment enthusiasm is still high.
Did you know? AMFI states that assets in small cap funds managed had crossed ₹2.4 lakh crore as of early 2025 with a 24 percent year on year growth.
Major Characteristics or Strongpoints of Small Cap Equity Funds
- It concentrates on those firms that are ranked at 251 and below according to SEBI norms.
- Great growth prospects as opposed to large caps or even mid cap funds.
- Much volatility and risk, stronger up and down.
- Good when the investor is of high risk and has a long term investment horizon.
- Operated by professional fund managers who are experts in their areas of operations.
- Minimum lock-in: There are no mandatory lock-ins but a horizon of 5 years or longer is strongly suggested.
Small Cap Funds 2025 Key Parameter
| Parameter | Details |
|---|---|
| Minimum Investments | ₹500 (SIP), ₹5000 (lump sum) |
| Typical AUM (2025) | ₹2000 crore - ₹24,000 crore |
| 5 Year CAGR Returns | 18% - 22% |
| Expense Ratio (avg) | 1.7% (Regular) 0.65% (Direct) |
| Exit Load | 1% when redeemed prior to 1 year |
Historical returns, which are not the performance measures of the future. Source: Value Research, 2025
People also ask
Q: Is the small cap equity funds safe to invest in 2025?
A: Small cap funds are risky because volatile. Outlook of a 5-7 year and diversify to reduce risk.
Who needs to think about small cap equity funds
Small cap equity funds can be best indicated to the investor likely to endure sudden market changes and those who want to invest in their portfolio aggressively. These are the people these funds are suitable to:
- Young employees who have 7-10 years investments in mind.
- Established investors who wish to increase returns at the cost of increased risk.
- Investors interested in diversification other than bluechip or large cap stocks.
- Investors that are not experiencing difficulties with frequently monitoring their investments.
Senior citizens, risk-averse savers and individuals who require funds within a period of three years do not fit well in small cap funds.
Advantages and disadvantages of Small Cap Equity Funds
Advantages
- High bull market returns are very possible.
- The first mover into Indian emerging stories.
- A portfolio of numerous high growth segments.
- Research based and professional selection.
Disadvantages
- Very volatile, prone to severe corrections in the market.
- The small cap stocks trade frequently and thus, some have liquidity risks.
- Patient, may not perform well during bears.
- The funds may differ significantly in terms of performance.
Professional opinion: Small caps require belief and long investment term. Seldom does it happen so, that an over-night returning takes place, but organization of patience is frequently rewarded. Amit Desai is the Head of Equity Research at Mumbai.
The operation of Small Cap Equity Funds
Fund managers create a portfolio comprising of 50-100 stocks out of the qualified universe that is not among the top 250 companies in terms of market capitalisation. The stocks are chosen based on the analysis of factors such as innovative products, growth momentum, quality of management, debt levels and market trends.
The analysis of the portfolio by fund managers is regularly reassessed with the sale of companies with a weakening of fundamentals and the introduction of new high potential names. Equity funds are said to be liquid, but when taken to the extremes, abrupt redemptions may compel the fund to sell unfamiliar stocks at a disadvantage.
People also ask
Q: How do small cap mutual funds differ with large cap funds?
A: Small cap funds are those investing in the companies that are not in the top 250 by the market capital and large caps focus on the top 100. Small caps are riskier and give a greater growth.
Performance Trends: 2024 and 2025 Outlook
The recent couple of years have witnessed a strong recovery of the small cap equity funds after the pandemic. In the case of FY 2024, Nifty Smallcap 250 index yielded approximately 23 percent. There are some of the top small cap funds that have yielded better annualized returns of more than five years of over 19 percent compared with most of the large and even mid cap funds.
Nevertheless, at the end of 2023 and early 2024 there was a high volatility because of global inflation, geopolitical issues, and violent sectoral rotation. Market analysts assume that small caps will be cautious and still optimistic in 2025 due to the robust GDP growth of India, fast adoption of digital by the MSMEs, and industry winds in the renewable energy, defence and micro-finance sector.
| Year | Nifty smallcap 250 TRI | Average small cap fund returns |
|---|---|---|
| 2023 | 32% | 29% |
| 2024 | 23% | 21% |
| 2025 (est.) | ~16-18% | ~15-17% |
Market trend projections; the real returns could be different.
Did you know? Over 40 percent of BSE 500 firms were small cap stocks with less than 20 years of existence.
Before investing in small cap equity funds one should take into account these factors
- Time to invest: 5 years or more preferably.
- Risk-taking prowess: Do you have the capacity to endure 20-25% declines without going into panic-selling mode?
- Fund house reputation: The reputation of the fund in terms of the consistency of performance and ethical track record of the AMC is important.
- It varies on the style of Fund manager: Aggressive or conservative, high turnover, or buy and hold.
- Past returns: Evaluate up years and challenging years.
- Portfolio overlap: Do not have too many similar funds.
People also ask
Q: In 2025 should I invest in small cap funds either on SIP or lump sum?
A: small caps should be invested with SIP, which is used to average out the volatility. Lump sum should be used in the course of market correction.
How to Select the most successful small cap equity funds in India 2025
- Compare 3 and 5 years returns, particularly in bear markets.
- Seek downside risk that is below average and constant alpha.
- Examine the expense ratio, high cost will consume long term gains.
- Assess assets under management (AUM) do not take small funds or those that have inflated too fast.
- Diversification in the check sector - do not have funds that are focused on single industry themes.
- Examine experience and tenure of fund managers.
Small Cap Equity Funds (2025) Must Watch
| Fund Name | 5Y CAGR Returns | Expense Ratio | AUM (CR) | Downside Capture |
|---|---|---|---|---|
| Nippon India Small Cap | 22.6% | 0.65% | 41,230 | 0.83 |
| SBI Small Cap | 20.2% | 0.81% | 20,366 | 0.74 |
| Quant Small Cap | 25.7% | 0.72% | 11,401 | 0.91 |
| Axis Small Cap | 17.9% | 0.69% | 17,980 | 0.82 |
| Tata Small Cap | 20.4% | 0.81% | 7,793 | 0.79 |
Better protection in falling markets: Low capture of downsides.
Expert opinion: Pursuing top performing small cap fund is a dangerous practice. Consistency, risk discipline and fund manager track record. - Shreya Naik, Pune Based Financial Planner.
Small Cap Equity Funds Tax Treatment
Small cap equity funds are taxed in the same way as the rest of the equity mutual funds in India.
- Short Term Capital Gains (holder under 1 year): 15% (surcharge)
- Long Term Capital Gains (holding greater than 1 year): 10 percent on gains exceeding ₹1 lakh of a financial year.
- Dividend earnings are summed up with your income and taxed according to slab.
Tax Benefits
- Gains tax is paid only when the investment is sold/redeemed.
- SIP investments receive the purchase date of taxation separately.
People also ask
Question: Are small cap funds eligible to receive Section 80C tax benefit?
A: No. Section 80C applies only to ELSS (tax saving funds) and not regular small cap funds.
How to avoid the most common errors when investing in small cap equity funds
- Casing hot competitors with no risk evaluation.
- Selling out on small cap corrections in panic.
- Too much concentration into a single fund or industry.
- Raising an indifferent eye to your overall portfolio allocation.
The most significant habits among the small cap investors are patience, research and diversification.
Should You Invest in Small Cap Equity funds now?
Small cap funds work well when the Indian economy has been on an upward growth, with a good liquidity status, and a positive sentiment. In this case, assuming that you are of high risk, 5-7 year horizon, and desire to own the next growth stories in India, 2025 should be a decent year to begin exposure.
Nevertheless, staggered investments through SIP, close supervision, and reviewing of the same are necessary. Exposure should not exceed 10-20 percent of the total equity.
Did you know? The majority of SIP investors in small cap funds who held on to their investments over 7 years after volatility still ended up making higher returns compared to that of fixed deposits.
Small Cap v. Other Equity Funds Comparison Table
| Characteristics | Large Cap | Mid Cap | Small Cap |
|---|---|---|---|
| Market Cap Focus | Top 100 | 101-250 | 251+ |
| Volatility | Low | Medium | High |
| Growth Potential | Stable | Moderate | Highest |
| Minimum Time period | 3 + years | 5 + years | 7+ years |
| Typical 5Y CAGR | 12-14% | 15-17% | 17-22% |
| Fund Size (AUM) | Maximum | Median | Small to Large |
Quick Recap TLDR
- Small cap equity funds invest in companies with more than top 250 market cap.
- Ideal in the case of long term and aggressive investors ready to risk.
- Likely to experience high ups and downs and high returns in 5-7 years.
- Volatility: Invest in SIPs, Diversify and stay with quality fund houses.
- Not one to be steady or short-term oriented.
Pro tip: Small caps are rewarded to the patient and not to the impulsive. Be engaged, take a look every year, and do not panic in periods of market turbulence.
People Also Ask FAQ
Q1: What will occur in case of a decline in the small cap stocks in 2025?
A1: The notional losses of small cap funds could be high, however, in the past, rebounds have been excellent after the bull cycles. Remain composed, keep taking your SIPs and never panic and redeem.
Q2: What proportion of my mutual fund portfolio is to be composed of small cap funds?
A2: 10-20 of total equity holdings, preferably, depending on risk profile and investment horizon.
Q3: Will small cap index funds or small cap actively managed funds be better to invest in 2025?
Thesis Statement: In 2025, lots of actively managed small cap funds continue to outperform their indices because of improved stock selection, although index funds have become cheaper and more predictable beginners.
Q4: How much will be required as a minimum to begin investing in small cap mutual funds?
A4: The majority of the small cap funds welcome SIPs of ₹500 per month or lump sum of ₹5000 and upwards.
Q5: Are NRIs allowed to make investments in small cap equity funds within India?
A5: Yes, NRIs are allowed to invest in most Indian equity mutual funds such as small cap funds on the condition that they observe KYC and FEMA rules.
Sources
- AMFI India - Small Cap Funds
- Mutual Funds regulation, SEBI
- ValueResearchOnline - Performance of fund
