Small-cap mutual funds, which invest in the stocks of very small companies, had a rough year in 2025. On average, they gave a negative return of 5 per cent. But in November last year, these funds started
drawing investor interest again, with Rs 4,406 crore flowing into them.
Investors are cautious because small companies often have high valuations and the market has been volatile.
According to the Economic Times, Mutual fund managers and advisors say the sector is expensive, yet long-term investors can still benefit by investing gradually over time. Small-cap funds can create wealth, but patience and a high risk tolerance are needed.
Small Cap Funds Focus On Tiny Companies
These funds put most of their money into companies ranked below 250 in market size. At least 65 per cent of the fund must go into small-cap stocks.
Small companies are more unpredictable than bigger ones, which makes the funds risky. Prices can swing a lot in a short period, so small-cap funds are suited only for aggressive investors who can handle ups and downs and plan to stay invested for many years.
Why Consider Small Cap Funds?
Even though small-cap funds are risky, they can give high returns over time. For instance, over 10 years, the category has reportedly returned about 19 per cent on average.
But not all small companies succeed. Many are unknown, lightly researched, or run by managers who might make big claims. Some stocks can rise fast, while others fail and lose value quickly.
Finding The Right Funds Matters
Investing in small caps requires careful selection of fund managers who know the sector well.
It is also important to check how the funds perform during market drops. A well-managed small-cap fund can produce big gains, while a poorly managed one can lead to heavy losses.
Small Cap Funds Worth Watching
Here are some funds that investors can consider in January 2026:
– Axis Small Cap Fund
– SBI Small Cap Fund
– Kotak Small Cap Fund
– Nippon India Small Cap Fund
Funds are ranked based on factors like returns over the last three years, consistency, downside risk, and risk-adjusted performance compared to the market. Asset size is also considered, with reportedly a minimum of Rs 50 crore for equity funds.
