Small cap stocks may be down, but many investors are still crazy about small-cap mutual funds.

Everyone knows that small-cap funds are risky and they can be highly volatile.

That is their nature. You simply can’t do anything about it.

What you can do is choose right small-cap fund and invest your hard-earned money in right way into these funds.

But first let’s see.

What are Small Cap funds?

In small cap funds, a large portion of the investment is done in companies that are small in size or have a small capitalization.

According to a new SEBI definition, small-cap funds invest in small-cap stocks or stocks that are ranked below 250 in the stock exchange in terms of market capitalization.

Most small-cap funds invest around 60-90% in small caps and the rest in mid-caps and large caps to provide some stability to the investment.

Mutual fund houses offering small-cap funds have professional fund management teams that have the requisite expertise in selecting the right amount of equity in each and every portfolio.

The success of these funds depend on the amount of time invested by fund houses in research and finding the right dark horse stocks in the small-cap segment.

Over the last one month, small-cap funds are down by 8%. But do not forget that in 2017, they were up by 55%.

Not only that, in terms of a 10-year return, small-caps are definitely the best performing funds.

What are the benefits of investing in Small Cap funds?

Though these funds are highly risky, they have their own sets of advantages.

Benefits of having small-cap funds in your investment portfolio

1.High Returns

Small cap funds have exponential growth potential and give high returns on investment if right stocks are picked from the small-cap segment.

2. Diversification tool

Small cap stocks provide good room for diversification in a fund’s portfolio, as during the investing period, it often happens that large cap stocks don’t perform and small-cap stocks grow quickly.

3. Growing your investment quickly

They are under followed in the stock market and usually untapped by institutional investors, giving an opportunity to wise investors to grow their investment quickly.

4. Flexible

Small-cap companies tend to be more flexible than large-cap companies and hence can adapt to changes more easily..

As most of these haven’t yet expanded into various different lines of business, they aim to grow their current business lines.

5 Best Small Cap funds for 2018

Here is a list of top 5 small-cap funds for you to invest in 2018.

1.HDFC Small Cap Fund – Direct – Growth

This is one of the most popular small cap mutual fund in the market right now.

Key Information

Launch Date 1 January 2013
NAV (4 Oct 2018) ₹44.4
Plan Type Direct
Rating by Groww 5 Star
AUM (Fund Size) ₹4,143 Cr
Riskometer Moderately High
Minimum SIP ₹500
Minimum SWP ₹500
Performance w.r.t its Benchmark Has consistently outperformed its benchmark NIFTY Small-cap 100 TRI since its launch.
Age of the fund 5 years old
Expense Ratio 0.54%
Exit Load If redeemed bet. 0 Year to 1 Year; Exit Load is 1%;
Type  Open Ended

Returns per annum

HDFC Small Cap Fund
Fund Name 1Y 3Y 5Y Category Risk
HDFC Small Cap Fund - Direct - Growth 1.4% 18.63% NA Equity
(Small Cap)
Moderately High

Investment Objective

The investment objective of the scheme is to generate long-term capital growth from an actively managed portfolio of equity and equity-related securities including equity derivatives by investing predominantly in small-cap companies.

However, there is no assurance or guarantee that the investment objective of the scheme will be achieved.

Holding Analysis

This fund has exponential growth potential and gives high returns on investment.

This fund is best suited for investors with a high-risk appetite and even for seasoned investors.

Investors who have a very good idea of mutual funds and risks associated with them can opt for this fund.

2. L&T Emerging Businesses Fund – Direct – Growth

This is relatively new to the category but has made its mark since launch.

Key Information

Launch Date 12 May 2014
NAV (4 Oct 2018) ₹24.9
Plan Type Direct
Rating by Groww 5 Star
AUM (Fund Size) ₹4,934 Cr
Riskometer High
Minimum SIP ₹500
Minimum SWP ₹500
Performance w.r.t its Benchmark Has not perform well than its benchmark NIFTY Small-cap 100 TRI in last one year.
Age of the fund 4 years old
Expense Ratio 1.57%
Exit Load If redeemed bet. 0 Year to 1 Year; Exit Load is 1%;
Type  Open Ended

Returns per annum

L&T Emerging Businesses Fund - Direct - Growth
Fund Name 1Y 3Y 5Y Category Risk
L&T Emerging Businesses Fund - Direct - Growth -8.32% 19.16% NA Equity
(Small Cap)
High

Investment Objective

The scheme is primarily a diversified equity fund which will invest predominantly in small-cap stocks to generate long-term capital appreciation.

However, there is no assurance or guarantee that the investment objective of the scheme will be achieved.

Holding Analysis

Last one has not been good for this fund, giving returns in negative.

But the performance of only last 1 year is not the correct criteria to judge this fund’s true potential.

Also Read: HDFC Small Cap vs L&T Emerging Businesses Fund: Which one is the better small-cap fund?

3. SBI Small Cap Fund – Direct – Growth

This fund recently moved to an elite group of funds with 5 start rating.

Key Information

Launch Date 2 January 2013
NAV (4 Oct 2018) ₹52.9
Plan Type Direct
Rating by Groww 5 Star
AUM (Fund Size) ₹792 Cr
Riskometer Moderately High
Minimum SIP ₹500
Minimum SWP ₹1,000
Performance w.r.t its Benchmark Has consistently outperformed its benchmark NIFTY Small-cap 100 TRI since its launch.
Age of the fund 5 years old
Expense Ratio 1.47%
Exit Load If redeemed bet. 0 Year to 1 Year; Exit Load is 1%;
Type  Open Ended

Returns per annum

SBI Small cap fund
Fund Name 1Y 3Y 5Y Category Risk
SBI Small Cap Fund - Direct - Growth -8.74% 17.14% NA Equity
(Small Cap)
Moderately High

Investment Objective

The scheme seeks to generate income and long-term capital appreciation by investing in a diversified portfolio of predominantly equity and equity-related securities of companies identified as industry leaders.

However, there is no assurance or guarantee that the investment objective of the scheme will be achieved.

Holding Analysis

This fund has given very high return over the 5-year tenure as compared to other funds in the category.

So, invest in this fund for long-term in this fund through SIP mode.

4. Reliance Small Cap Fund – Direct – Growth

This is a small cap equity oriented mutual fund launched on January 1, 2013.

It is a fund with high risk and has given a return of 26.01% since its launch.

Key Information

Launch Date 1 January 2013
NAV (4 Oct 2018) ₹41.6
Plan Type Direct
Rating by Groww 4 Star
AUM (Fund Size) ₹6,696 Cr
Riskometer Moderately High
Minimum SIP ₹100
Minimum SWP ₹100
Performance w.r.t its Benchmark Has consistently outperformed its benchmark NIFTY Small-cap 100 TRI since its launch.
Age of the fund 5 years old
Expense Ratio 1.47%
Exit Load If redeemed bet. 0 Year to 1 Year; Exit Load is 1%;
Type  Open Ended

Returns per annum

Reliance Small Cap Fund
Fund Name 1Y 3Y 5Y Category Risk
Reliance Small Cap Fund - Direct - Growth -5.55% 16.2% 31.91% Equity
(Small Cap)
Moderately High

Investment Objective

The scheme seeks to generate long-term capital appreciation by investing predominantly in equity and equity related instruments of small cap companies.

However, there is no assurance or guarantee that the investment objective of the scheme will be achieved.

Holding Analysis

Among small-cap schemes that focus on the quality of companies, Reliance Small Cap Fund Direct has distinguished itself by performing consistently well by sticking to its investment mandate.

This is not only one of the top performing small-cap funds in India, it is also the only fund that allows a minimum investment of ₹100.

5. Aditya Birla Sun Life Small Cap Fund – Direct – Growth

This is a small cap equity oriented mutual fund launched on January 1, 2013.

It is a fund with high risk and has given a return of 26.01% since its launch.

Key Information

Launch Date 1 January 2013
NAV (4 Oct 2018) ₹35.9
Plan Type Direct
Rating by Groww 4 Star
AUM (Fund Size) ₹2,182 Cr
Riskometer Moderately High
Minimum SIP ₹500
Minimum SWP ₹100
Performance w.r.t its Benchmark Has under performed than its benchmark NIFTY Small-cap 100 TRI in last one year.
Age of the fund 5 years old
Expense Ratio 1.22%
Exit Load If redeemed bet. 0 Year to 1 Year; Exit Load is 1%;
Type  Open Ended

Returns per annum

Aditya Birla Sun Life Small Cap Fund
Fund Name 1Y 3Y 5Y Category Risk
Aditya Birla Sun Life Small Cap Fund - Direct - Growth -17.3% 12.68% 22.84% Equity
(Small Cap)
Moderately High

Investment Objective

The scheme seeks to generate long-term capital appreciation by investing predominantly in equity and equity related instruments of small cap companies.

However, there is no assurance or guarantee that the investment objective of the scheme will be achieved.

Holding Analysis

Last 1 year performance is highly disappointing, however, as I have mentioned earlier, last 1 year performance is not enough to judge the caliber of a fund.

Also Read: 5 Steps to Reduce Losses When Invested in Small Cap Funds

How should you invest in small cap funds?

If you are an experienced investor and have a sound knowledge of investing in mutual funds, then go ahead with small cap funds, keeping both advantages and disadvantages in mind.

But investors should think of investing for long-term in small cap stocks as it has been observed that these companies take 3 to 4 years to show superior performance.

Best part about small caps funds is that they are underfollowed in the stock market and therefore, they are untapped by institutional investors, giving a huge opportunity to wise investors to grow their investment quickly.

Conclusion

Small cap funds are highly risky and volatile investment instruments as compared to large and mid-cap funds, due to their exposure to high performing equities.

These funds have an objective of seeking capital appreciation through investment in high growth stocks.

Small cap funds are suitable for investors who are willing to take a high amount of risk with their capital, have a longer time horizon for their investments and are looking for higher returns compared to blue-chip companies.

Over the last six months, there has been under-performance in small and mid-cap funds.

But a long-term investor should ignore this short period of under-performance and continue to invest through SIPs and STPs in small-cap mutual funds.

 Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww