What are the best small-cap mutual funds?

Small-cap mutual funds are designed to invest in stocks of small-cap companies, typically those with market capitalizations under ₹5,000 crore. These funds can offer the potential for high returns but also come with significant risks due to the volatility associated with smaller companies. If you’re looking to invest in small-cap mutual funds, it's important to choose wisely to maximize returns while managing risks. In this blog, we will guide you through some of the best small-cap mutual funds to consider for 2024, along with factors to keep in mind when selecting these funds.

1. What Are Small-Cap Mutual Funds?

Small-cap mutual funds invest primarily in companies that are smaller in size, typically with a market capitalization under ₹5,000 crore. These companies are usually in the early stages of growth and may offer the potential for high returns as they expand. However, they also tend to be more volatile, and the risk of price fluctuations can be higher compared to large-cap or mid-cap stocks.

Investing in small-cap mutual funds allows you to diversify your portfolio and tap into the growth potential of emerging companies, while also benefitting from the expertise of professional fund managers who handle the selection and management of the stocks.

2. Benefits of Small-Cap Mutual Funds

Investing in small-cap mutual funds can offer several advantages for long-term investors, especially those who are willing to take on more risk for potentially higher rewards. Here are some key benefits:

• High Growth Potential: Small-cap stocks often have higher growth potential compared to larger companies, as they are in the early stages of development and may grow at a faster pace.
• Diversification: By investing in a small-cap mutual fund, you gain exposure to a diverse portfolio of small-cap stocks, which can help reduce individual stock risk.
• Professional Management: These funds are managed by experienced professionals who research and pick small-cap stocks based on in-depth analysis, giving you an edge in identifying high-potential companies.
• Long-Term Capital Appreciation: Small-cap mutual funds are suited for investors who have a long-term investment horizon and are looking to benefit from capital appreciation over time.

3. Best Small-Cap Mutual Funds to Invest in 2024

Here are some of the best small-cap mutual funds to consider for 2024 based on their historical performance, consistency, and management expertise:

• Axis Small Cap Fund: One of the most popular small-cap mutual funds, Axis Small Cap Fund focuses on high-growth companies in the small-cap segment. It has delivered impressive returns over the years and is managed by a reputable fund manager.
• Nippon India Small Cap Fund: Known for its aggressive approach, Nippon India Small Cap Fund invests in emerging companies with high growth potential. The fund has consistently outperformed its benchmark index and is suitable for risk-tolerant investors.
• Canara Robeco Small Cap Fund: This fund focuses on stocks that have strong growth prospects but are still undervalued. It has a solid track record of generating long-term wealth for its investors.
• HDFC Small Cap Fund: A consistent performer, HDFC Small Cap Fund has shown strong returns in recent years. The fund focuses on investing in small-cap companies that are expected to perform well over the long term.
• DSP Small Cap Fund: This fund aims to identify high-growth companies in the small-cap segment. The DSP Small Cap Fund has delivered significant returns over the long term and continues to be a good choice for investors seeking capital appreciation.

These funds have been chosen based on their historical returns, portfolio composition, and the expertise of their fund managers. Remember that past performance is not always indicative of future results, and it's essential to review your investment goals and risk tolerance before investing in any mutual fund.

4. Key Factors to Consider When Investing in Small-Cap Mutual Funds

Before investing in small-cap mutual funds, consider these important factors:

• Risk Tolerance: Small-cap mutual funds are more volatile than large-cap funds. Ensure that you have a high-risk tolerance and are prepared for fluctuations in the market.
• Investment Horizon: Small-cap funds are best suited for long-term investors. Since these stocks can be highly volatile in the short term, it’s crucial to have a 5-10 year investment horizon.
• Diversification: Small-cap stocks can be riskier, so diversifying your investments across various sectors and industries can help mitigate some of that risk.
• Expense Ratio: Check the expense ratio of the mutual fund. A lower expense ratio is preferable, as it leaves more of your investment for growth.
• Past Performance: Although past performance doesn’t guarantee future results, reviewing the fund's track record can give you a sense of its ability to manage risk and generate returns.

5. Conclusion

Small-cap mutual funds are an excellent option for investors who are looking for high growth potential and are willing to tolerate higher risk. By choosing funds with strong management teams, a proven track record, and a diversified portfolio, you can take advantage of the opportunities these funds offer. Remember to assess your risk profile and investment goals before diving into small-cap mutual funds to ensure that they align with your overall financial strategy.