5 Best Small Cap Funds for 2024 – Top Performing Small Cap Mutual Funds in India

December 5, 2023 Mutual Fund

​​Small Cap Mutual Funds are high risk – high return equity mutual funds. These funds offer investors an opportunity to benefit from the high growth potential of lesser-known gems of the equity market. This category of equity mutual fund can potentially generate significant alpha and even outperform most other sub-categories of equity-oriented mutual funds over the long term.

At PersonalFN, we have shortlisted the five best Small Cap Mutual Funds for 2024. But before we reveal our list, let us take a look at the basics of the category.

This article includes

• What are Small Cap Mutual Funds?

• Does it make sense to invest in Small Cap Funds in 2024?

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

• What are the risks involved in Small Cap Mutual Funds?

• Who should invest in Small Cap Mutual Funds?

• How much should you allocate in Small Cap Mutual Funds?

• How are Small Cap Mutual Funds taxed?

• Which are the best Small Cap Mutual Funds for 2024?

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. They have the flexibility to invest the balance 35% in stocks of large-cap or mid-cap companies, debt instruments, or cash and equivalents.

SEBI defines small-cap stocks as companies ranking beyond 250 in terms of full market capitalisation. Some of the popular small-cap names include Carborundum Universal, Blue Star, Krishna Institute of Medical Sciences, Cyient, and Brigade Enterprises.

Examples of Small Cap Mutual Funds in India

The securities quoted are for illustration only and are not recommendatory.
AUM data as of October 31, 2023
(Source: ACE MF, data collated by PersonalFN) 

Does it make sense to invest in Small Cap Funds in 2024?

Over the past year, small-cap stocks have outperformed and exceeded all expectations. The Nifty Smallcap 250 index has recorded gains of over 35% in the last one year, outpacing its mid-cap and large-cap peers. The index is currently at its all-time high levels, with several stocks trading close to their 52-week highs.

However, amid the stellar rise in the prices of small-cap stocks, the valuations have soared, and thus the margin of safety appears to have narrowed.

The S&P BSE Smallcap to Sensex ratio, which is a key determinant of valuations in the small-cap segment, currently stands at a 10-year peak of 0.6. This level was last seen in 2018, just before the mid and small-cap crash of 2018-19.

Smallcap to Sensex ratio is at a peak

Data as of December 01, 2023
(Source: ACE MF, data collated by PersonalFN) 

Despite soaring prices, pockets of value may still exist in some fundamentally sound stocks in the small-cap segment. Such stocks may still have room for further growth and the potential to scale fresh peaks.

However, it is important to be cautious as the equity markets are known to be cyclical — peaks are followed by downfalls, and vice versa. It will not be a surprise if a severe correction precedes the new highs.

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 the equity portfolio.

Small Cap stocks have the potential to generate high alpha and create significant wealth as these companies are generally under-researched. They also comprise innovative or niche businesses with a hidden growth potential and a scope to increase market share. This gives them the room for a higher upside.

Favourite stocks of Small Cap Mutual Funds

The securities quoted are for illustration only and are not recommendatory.
AUM data as of October 31, 2023
(Source: ACE MF, data collated by PersonalFN) 

What are the risks involved in Small Cap Mutual Funds?

Risks and returns are the two sides of the same coin. Higher returns are usually associated with higher risks such as in the case of Small Cap Funds. The small-cap universe comprises over 4,000 stocks. However, many of these lack fundamentals and are therefore not actively tracked by analysts and market experts. Only a few hundred stocks fare well on key parameters such as financial strength, liquidity, quality of management, etc.

When market sentiments turn pessimistic, the downside risk is higher in the case of small caps compared to mid and large caps. In other words, the investments can fluctuate from thrilling highs to dangerous lows, much akin to riding a roller coaster ride. This highlights that the small-cap investment is not for the faint of heart.

Since small caps are inherently riskier than well-established companies, and one cannot expect all bets to turn out well. The chances of failure in smaller-sized businesses are much higher compared to bigger businesses.

Watch this video to understand in detail whether you should buy more or sell your Mid Cap Mutual Fund units in the current market scenario:

Who should invest in Small Cap Mutual Funds?

Investors looking to uncover the potential of multi-baggers of tomorrow while they are still relatively undiscovered can 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, only those individuals who have a very high risk appetite to handle sharp market volatility and an investment horizon of at least 7-10 years can consider investing in Small Cap Funds.

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 15-20% of the equity mutual fund portfolio.

How are Small Cap Mutual Funds taxed?

Small Cap Mutual Funds are equity-oriented mutual funds and hence, they follow equity taxation. The holding period for Small Cap Mutual Funds from a tax perspective is 12 months. So, if investors sell their Small Cap Mutual Fund units before 12 months, the gains are subject to short-term capital gains (STCG) tax of 15%.

On the other hand, if they sell their Small Cap Mutual Fund units after completing one year, the gains are subject to long-term capital gains tax (LTCG) of 10%, but only if the gains exceed Rs 1 Lakh in a financial year.

Which are the best Small Cap Mutual Funds for 2024?

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 for 2024.

Let us finally take a look at the best Small Cap Mutual Funds for 2024…

List of the best Small Cap Mutual Funds for 2024

Past performance is not an indicator of future returns
Data as of December 01, 2023. Direct Plan-Growth option considered
(Source: ACE MF, data collated by PersonalFN) 

Best Small Cap Mutual Fund for 2024 #1: HDFC Small Cap Fund

HDFC Small Cap Fund was launched in April 2008 as a Multi-cap Fund and was later rechristened as HDFC Small and Midcap Fund. In 2018, HDFC Mutual Fund once again recategorised and rechristened to HDFC Small Cap Fund. The fund has established a solid track record of outperforming the benchmark and many of its peers across various time frames. Consequently, HDFC Small Cap Fund has grown in popularity. The fund has an AUM of Rs 23,183 crore as of October 2023, making it the second-largest scheme in the Small Cap Fund category.

Fund Snapshot: HDFC Small Cap Fund

Past performance is not an indicator of future returns. The securities quoted are for illustration only and are not recommendatory.
Portfolio data as of October 31, 2023
Returns and NAV data as of December 01, 2023. Regular Plan – Growth Option considered
(Source: ACE MF, data collated by PersonalFN) 

HDFC Small Cap Fund has done well under the supervision of Mr Chirag Setalvad, who is known for his high conviction long-term bets. In the last five years, HDFC Small Cap Fund recorded growth at a CAGR of 18.2%. HDFC Small Cap Fund focuses on maintaining a well-diversified portfolio comprising fundamentally sound, high-quality small-cap stocks spread across sectors and holds them with a long-term view to mitigate market risk.

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

Best Small Cap Mutual Fund for 2024 #2: ICICI Pru Small Cap Fund

Launched in October 2007, ICICI Pru Small Cap Fund currently has an AUM of Rs 6,000 crore. The fund was recategorised as a Small Cap Fund in 2018, which is a drastic shift from its previous mandate of Thematic Fund under which it focused on investing in India and other Asian markets. ICICI Pru Small Cap Fund invests in businesses with good and stable business models which are run by competent management. It also considers companies where the current earnings are below normal but have the potential for recovery.

Fund Snapshot: ICICI Pru Small Cap Fund

Past performance is not an indicator of future returns. The securities quoted are for illustration only and are not recommendatory.
Portfolio data as of October 31, 2023
Returns and NAV data as of December 01, 2023. Regular Plan – Growth Option considered
(Source: ACE MF, data collated by PersonalFN) 

ICICI Pru Small Cap Fund aims to create a well-diversified portfolio of high quality small-cap stocks spread across sectors. While the past performance is not comparable due to the change in investment strategy, the fund has done well under its current mandate. In the last five years, ICICI Pru Small Cap Fund has delivered returns at a CAGR of 27.1% and has generated superior risk-adjusted returns. Experienced fund manager Mr Anish Tawakley has recently taken charge of the fund and thus, the fund can potentially continue to do well under his supervision.

Best Small Cap Mutual Fund for 2024 #3: Nippon India Small Cap Fund

Having a corpus of Rs 37,319 crore, Nippon India Small Cap Fund is currently the largest scheme in the Small Cap Fund category. Since its launch 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. The securities quoted are for illustration only and are not recommendatory.
Portfolio data as of October 31, 2023
Returns and NAV data as of December 01, 2023. Regular Plan – Growth Option considered
(Source: ACE MF, data collated by PersonalFN) 

The fund holds a large portfolio of over 150 stocks. Moreover, it limits the exposure in 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.

(Note: Owing to the large corpus, Nippon India Small Cap Fund has stopped accepting fresh lump sum investment w.e.f. from July 07, 2023. This restriction will also apply in the case of switch in transactions. Moreover, fresh registrations through SIP or STP will continue with a limit of Rs 5 lakh per day per PAN).

Best Small Cap Mutual Fund for 2024 #4: Quant Small Cap Fund

Incepted in October 1996, Quant Small Cap Fund is known for its momentum-driven investment strategies. Quant Small Cap Fund follows an aggressive investment approach whereby it constantly hunts for attractive opportunities. The fund is sector and benchmark agnostic. Its 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 Small Cap Fund

Past performance is not an indicator of future returns. The securities quoted are for illustration only and are not recommendatory.
Portfolio data as of October 31, 2023
Returns and NAV data as of December 01, 2023. Regular Plan – Growth Option considered
(Source: ACE MF, data collated by PersonalFN) 

Though Quant Small Cap Fund’s performance until 2019 was below par, the 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 shifting 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 for 2024 #5: SBI Small Cap Fund

Launched in September 2009, SBI Small Cap Fund is the second-largest scheme in the Small-cap fund category which can be attributed to its commendable long-term track record. The fund looks to invest in high-growth-oriented stocks of small-sized companies, but is cautious about the price it is willing to pay. It also hunts for temporarily beaten-down stocks available at cheap valuations and does not resist taking a few short-term calls.

Fund Snapshot: SBI Small Cap Fund

Past performance is not an indicator of future returns. The securities quoted are for illustration only and are not recommendatory.
Portfolio data as of October 31, 2023
Returns and NAV data as of December 01, 2023. Regular Plan – Growth Option considered
(Source: ACE MF, data collated by PersonalFN) 

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. The fund has flourished and garnered under the expertise of its long-time fund manager Mr R Srinivasan. Under his supervision, the fund 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.)

This completes our list of the 5 best Small Cap Funds for 2024. Considering the volatile and uncertain nature of the small-cap segment, it will be better to take the Systematic Investment Plan (SIP) route when you invest in the best Small Cap Mutual Funds.

Related links:

4 Best Large Cap Mutual Funds for 2024 – Top Performing Large Cap Mutual Funds in India

3 Best Liquid Funds for 2024 – Top Liquid Mutual Funds for 2024

5 Best Mid Cap Funds for 2024 – Top Performing Mid Cap Mutual Funds in India

3 Best Banking & PSU Debt Funds for 2024

Note: This write-up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. 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.

This article first appeared on PersonalFN here