Small Cap Fund — What It Is, Who Should Invest & Best Funds

SEBI definition: Invests at least 65% in companies ranked 251st and below by market capitalisation.

Who should invest

Only for investors with a 10+ year horizon, very high risk tolerance, and the discipline not to redeem during corrections. Not suitable for beginners.

Risk level	Very High
Suggested horizon	10+ years
Historical returns	15–22% CAGR historically over 10 years (with extreme volatility)
Taxation	Equity taxation: LTCG at 12.5% after ₹1.25L exemption; STCG at 20%.

Advantages

• Highest return potential in equity mutual funds
• Captures tomorrow's mid and large caps
• True alpha generation possible

Drawbacks

• Extreme volatility — can fall 60-70% in crashes
• Lowest liquidity — harder to exit in crisis
• Requires 10+ year horizon without touching the money

Frequently asked questions

Should a beginner invest in small cap funds?

No. Small cap funds are for experienced investors who understand and can emotionally handle 50–70% portfolio drops. Beginners should start with large cap or balanced advantage funds.

Related categories

• Mid Cap Fund
• Flexi Cap Fund
• Large Cap Fund

See the best Small Cap Funds ranked by data, or filter every scheme in the fund screener. Historical returns describe the past only — mutual fund investments are subject to market risks.