When it comes to mutual funds, investors have various options to choose from based on their risk appetite and investment goals. Among these options, three major categories stand out: large-cap, mid-cap, and small-cap mutual funds. Each category has its unique characteristics, and in this article, we will dive into the world of small-cap funds, their risk levels, and potential for long-term returns.
What are Small Cap Mutual Funds?
Small-cap mutual funds invest in relatively smaller companies that have a market capitalization lower than large and mid-cap companies. These companies are often lesser-known and under-researched, making them potentially high-risk, high-reward investments. While large-cap and mid-cap funds offer stability, small-cap schemes can witness intense volatility, especially during bearish market phases.
The Potential of Small Cap Funds
Despite their higher risk levels, small-cap mutual funds can prove to be lucrative in the long run. Over time, they have the potential to outperform all other categories of mutual funds. Their ability to identify and invest in small companies with significant growth potential can lead to substantial returns for investors who are willing to weather short-term market fluctuations.
Top 10 Small Cap Funds with the Highest Three Year Returns
For investors seeking high returns, we have compiled a list of 10 small-cap funds with impressive three-year returns based on data available on Value Research:
- Quant Small Cap Fund – Direct Plan: 55.66%
- Nippon India Small Cap Fund – Direct Plan: 48.35%
- HSBC Small Cap Fund – Direct Plan: 46.00%
- HDFC Small Cap Fund – Direct Plan: 45.42%
- Canara Robecco Small Cap Fund – Direct Plan: 44.19%
- Tata Small Cap Fund – Direct Plan: 43.71%
- Kotak Small Cap Fund – Direct Plan: 43.12%
- Franklin India Smaller Companies Fund: 41.89%
- Sundaram Small Cap Fund – Direct Plan: 40.85%
- Axis Small Cap Fund – Direct Plan: 37.95%
Tax Implications of Small Cap Funds
Investors must also consider the tax implications of investing in small-cap funds. Capital gains from units held for up to one year are considered short-term capital gains (STCG) and are taxed at 15%. However, if the holding period exceeds one year, the gains are classified as Long-Term Capital Gains (LTCG). Notably, up to ₹1 lakh from equity investments in a financial year is tax-free, but any amount exceeding this limit is subject to a 10% tax.
Increasing Inflow into Small Cap Funds
Small cap mutual fund schemes have recently witnessed a significant increase in the inflow of funds. According to the latest AMFI data, the inflow surged by 67 percent in the month of June, reaching a high of ₹5,471.75 crore compared to ₹3,282.50 crore in the preceding month. This influx signals growing investor interest in this category of funds.
Exploring New Categories ESG Scheme
In a positive development, capital markets regulator SEBI has allowed mutual funds to introduce five new categories under the ESG (environmental, social, and governance) scheme. These categories are exclusions, integration, best-in-class and positive screening, impact investing, and sustainable objectives. This move reflects the increasing focus on socially responsible investments.
Small-cap mutual funds offer investors an opportunity to invest in companies with significant growth potential. While they come with higher risk levels, their potential for long-term returns is noteworthy. As with any investment decision, it is crucial to conduct thorough research and consult certified experts before making choices that align with individual financial goals and risk tolerance.