A ₹10,000 monthly SIP in top small cap funds for 10 years has grown to ₹36-40 lakh.
That's not marketing. That's actual fund data from schemes like Quant Small Cap and Nippon India Small Cap. The catch? These same funds dropped 25-40% during corrections. Small caps don't forgive impatience.
At Belong, we talk to NRIs daily who either chase small cap returns blindly or avoid them entirely out of fear. Both approaches miss the point. Small caps belong in your portfolio, but only if you understand what you're buying into.
This guide ranks small cap funds using transparent criteria you can verify yourself. We've separated rankings by 5-year returns, by AUM, and by expense ratio. You'll also find index fund alternatives for those who prefer passive investing. No hidden agendas, just data.
Why Small Caps Deliver Outsized Returns
Small cap companies are India's emerging businesses. SEBI defines them as companies ranked 251st and beyond by market capitalization. They typically have market caps below ₹5,000 crore.
These are the companies building tomorrow's economy. Electric vehicle component makers. Specialty chemical manufacturers. Regional hospital chains. Fintech enablers. Names you won't find in headlines, but ones quietly compounding wealth.
The Nifty Smallcap 250 TRI delivered 33%+ YTD returns as of mid-2025. Mutual fund inflows into small cap schemes crossed ₹5,300 crore in May 2025 alone, according to AMFI data. This isn't speculation. It's institutional and retail money recognizing the opportunity.
Why do small caps outperform over long periods?
Growth runway is longer. A company with ₹500 crore market cap can realistically grow 10x. A ₹5 lakh crore company cannot.
Less analyst coverage means more mispricing. Large caps have 20-30 analysts tracking every move. Small caps might have 2-3. This creates opportunities for skilled fund managers to find undervalued gems.
Management has more skin in the game. Promoters of small companies often own 50-70% stakes. Their wealth is directly tied to company performance.
👉 Tip: Allocate 10-20% of your equity portfolio to small caps if you have a 10+ year horizon. Never make it your entire equity allocation.
The Risk Reality: What Nobody Tells You
Before we rank funds, let's talk about what can go wrong.
Small caps can fall 40-50% during corrections. During the 2022 correction, several small cap funds dropped 35-45%. Many investors who entered at peak valuations are still underwater.
Liquidity risk is real. When markets crash, small cap stocks become hard to sell. Fund managers holding illiquid stocks face redemption pressure, forcing them to sell at distressed prices.
Quality varies dramatically. Unlike large caps where most companies have proven track records, small caps include everything from future blue chips to companies that will go bankrupt.
Category AUM has exploded. Small cap fund AUM surged from ₹904 billion in September 2020 to ₹4.34 trillion in September 2025, according to AMFI. That's nearly 5x growth. When too much money chases limited quality stocks, valuations stretch.
This isn't meant to scare you. It's meant to prepare you. Small caps reward patient, disciplined investors. They punish those who chase past returns without understanding the risks.
Best Small Cap Funds Ranked by 5-Year Returns
This ranking focuses purely on trailing 5-year CAGR. Higher returns appear first.
Ranking Criteria: 5-year annualized returns as of December 2025. Data sourced from Groww, Value Research, and Tickertape.
Rank | Fund Name | 5Y CAGR | 3Y CAGR | 1Y Return | Expense Ratio |
|---|---|---|---|---|---|
1 | Quant Small Cap Fund | 33.3% | 18.5% | -8.2% | 0.75% |
2 | Nippon India Small Cap | 28.5% | 21.1% | -5.0% | 0.63% |
3 | Bandhan Small Cap Fund | 27.9% | 30.4% | 12.5% | 0.42% |
4 | Invesco India Small Cap | 27.9% | 25.5% | 8.2% | 0.55% |
5 | HDFC Small Cap Fund | 26.3% | 20.8% | 4.5% | 0.67% |
6 | Edelweiss Small Cap Fund | 26.2% | 20.6% | 3.8% | 0.48% |
7 | Tata Small Cap Fund | 25.8% | 32.7% | 10.2% | 0.42% |
8 | Axis Small Cap Fund | 23.6% | 18.6% | -2.5% | 0.52% |
9 | Kotak Small Cap Fund | 23.2% | 19.5% | 2.8% | 0.58% |
10 | SBI Small Cap Fund | 20.0% | 12.5% | 0.6% | 0.74% |
Data as of December 2025. Source: Groww, Tickertape, Value Research
Quant Small Cap Fund
The category leader with 33.3% CAGR over 5 years. What makes Quant different? Their VLRT framework: Valuation, Liquidity, Risk, and Time.
Fund manager Sandeep Tandon follows a quantitative, data-driven approach. The fund holds significant exposure to services (17.6%), healthcare (16.4%), energy (15.1%), and financials (13.9%). Top holdings include Reliance Industries (9.7%) and ITC (9.5%).
The catch: High volatility. Quant funds tend to swing more dramatically than peers during market cycles. The fund lost nearly 8% in 2025 YTD while some peers remained flat.
Why it stands out: Consistently top-quartile performance across 3, 5, and 7-year periods. Strong alpha generation with alpha ratio of 16.19.
Minimum investment: ₹5,000 lump sum, ₹1,000 SIP Exit load: 1% if redeemed within 1 year AUM: ₹30,170 crore
Nippon India Small Cap Fund
India's largest small cap fund by AUM at ₹68,970 crore. Launched in 2010, it's delivered 28.5% over 5 years with remarkable consistency.
Fund manager Samir Rachh has managed this fund for over a decade. The portfolio holds 200+ stocks across sectors, with financials (23.5%), consumer discretionary (17.6%), and industrials (18.2%) as top sectors.
The scale challenge: Managing ₹69,000 crore in small caps is notoriously difficult. The fund has increasingly added mid-cap and large-cap holdings to deploy capital efficiently.
Why it stands out: Highest alpha ratio in category at 17.75. Has navigated multiple market cycles successfully. Extremely diversified portfolio reduces company-specific risk.
Minimum investment: ₹5,000 lump sum, ₹100 SIP Exit load: 1% if redeemed within 1 year AUM: ₹68,970 crore
👉 Tip: Large AUM in small cap funds isn't always good. When funds get too big, they struggle to find enough quality small cap stocks and may drift toward mid caps.
Bandhan Small Cap Fund
A relatively young fund (launched February 2020) that has delivered exceptional performance. 27.9% over 5 years with the lowest expense ratio among top performers at 0.42%.
The fund focuses on financials (19%), healthcare (13%), and services (9.5%). Top holdings include Sobha Limited (2.9%), Cholamandalam Financial, and PCBL Chemical (3.2%).
Recent momentum: Led all small cap funds in AUM growth with ₹950+ crore inflows in a single month. Investors clearly recognize the value proposition.
Why it stands out: Exceptional cost efficiency. Delivers top-tier returns while charging significantly less than category average.
Minimum investment: ₹1,000 lump sum, ₹100 SIP Exit load: 1% if redeemed within 1 year AUM: ₹9,236 crore
SBI Small Cap Fund: The Underperformer Worth Discussing
Notice SBI Small Cap at the bottom with 20% 5-year returns? This deserves attention.
SBI Small Cap was once a category darling. It delivered massive returns between 2013-2020. Then it closed to new SIP investments due to oversized AUM. When it reopened, performance lagged.
The fund's conservative approach, focusing on quality over aggression, means it underperforms during rallies but protects capital during corrections. Its 12.5% 3-year return looks poor, but it fell less than peers during the 2022 correction.
Lesson: Past top performers don't stay on top forever. Don't chase funds based on 10-year returns if recent performance has deteriorated.
Best Small Cap Funds Ranked by AUM
Assets Under Management reflects cumulative investor trust. Higher AUM typically means longer track records and institutional credibility.
Ranking Criteria: Total AUM as of December 2025. Data from AMFI and fund factsheets.
Rank | Fund Name | AUM (₹ Cr) | 5Y CAGR | Expense Ratio |
|---|---|---|---|---|
1 | Nippon India Small Cap | 68,970 | 28.5% | 0.63% |
2 | HDFC Small Cap Fund | 38,020 | 26.3% | 0.67% |
3 | SBI Small Cap Fund | 36,272 | 20.0% | 0.74% |
4 | Quant Small Cap Fund | 30,170 | 33.3% | 0.75% |
5 | Axis Small Cap Fund | 21,500 | 23.6% | 0.52% |
6 | Kotak Small Cap Fund | 18,200 | 23.2% | 0.58% |
7 | Tata Small Cap Fund | 11,200 | 25.8% | 0.42% |
8 | Edelweiss Small Cap Fund | 9,800 | 26.2% | 0.48% |
9 | Bandhan Small Cap Fund | 9,236 | 27.9% | 0.42% |
10 | Invesco India Small Cap | 5,904 | 27.9% | 0.55% |
Data as of December 2025. Source: AMFI, fund factsheets
HDFC Small Cap Fund
Second largest with ₹38,020 crore AUM. Fund manager Chirag Setalvad brings 16+ years of experience, with 13 years specifically in fund management.
The fund maintains 10% in cash equivalents, unusually high for equity funds. This defensive positioning helps during corrections but may drag returns during rallies.
Top sectors include logistics (6%), capital goods, and financials. Top holdings include Bank of Baroda (3.6%), Firstsource Solutions, and eClerx Services.
Why investors trust it: HDFC brand credibility, experienced fund manager, and a quality-focused approach that prioritizes capital preservation alongside growth.
Axis Small Cap Fund
With ₹21,500 crore AUM, Axis Small Cap attracts investors seeking a balance between growth and risk management. Returns of 23.6% over 5 years are slightly below category average, but volatility is also lower.
The fund holds a concentrated portfolio of 60-70 stocks versus 200+ for Nippon. This reflects a high-conviction approach focused on quality companies rather than broad diversification.
Best for: Conservative investors who want small cap exposure without the extreme volatility of aggressive funds.
Best Small Cap Funds Ranked by Expense Ratio
Lower expenses directly boost returns. A 0.30% difference in expense ratio compounds to significant amounts over 15-20 years.
Ranking Criteria: Direct plan expense ratio (lowest to highest).
Rank | Fund Name | Expense Ratio | 5Y CAGR | AUM (₹ Cr) |
|---|---|---|---|---|
1 | Nippon India Nifty Smallcap 250 Index | 0.22% | 24.8% | 2,670 |
2 | Bandhan Small Cap Fund | 0.42% | 27.9% | 9,236 |
3 | Tata Small Cap Fund | 0.42% | 25.8% | 11,200 |
4 | Edelweiss Small Cap Fund | 0.48% | 26.2% | 9,800 |
5 | Axis Small Cap Fund | 0.52% | 23.6% | 21,500 |
6 | Invesco India Small Cap | 0.55% | 27.9% | 5,904 |
7 | Kotak Small Cap Fund | 0.58% | 23.2% | 18,200 |
8 | Nippon India Small Cap | 0.63% | 28.5% | 68,970 |
9 | HDFC Small Cap Fund | 0.67% | 26.3% | 38,020 |
10 | SBI Small Cap Fund | 0.74% | 20.0% | 36,272 |
Data as of December 2025. Source: Fund factsheets, Upstox
The Cost Efficiency Champions
Bandhan Small Cap (0.42%) delivers 27.9% returns while charging less than half of SBI Small Cap (0.74%). Over 20 years, this expense difference compounds to lakhs of rupees on a ₹50 lakh portfolio.
Tata Small Cap (0.42%) matches Bandhan's low costs with strong 3-year performance of 32.7%. It's newer, so 5-year data (25.8%) reflects a shorter track record.
Edelweiss Small Cap (0.48%) offers 26.2% returns at below-category expenses. Strong option for cost-conscious investors.
👉 Tip: Always choose Direct plans over Regular plans. The expense difference (0.5-1% annually) is pure savings that compounds over time.
Index Funds vs Active Small Cap Funds
Here's a question worth asking: Should you just buy a Nifty Smallcap 250 index fund?
The Nifty Smallcap 250 TRI delivered approximately 26.7% over 5 years. Most actively managed small cap funds beat this benchmark, but not all.
Parameter | Active Small Cap Fund | Smallcap 250 Index Fund |
|---|---|---|
Expense Ratio | 0.42-0.75% | 0.20-0.30% |
5Y Returns (avg) | 24-33% | 24-25% |
Stock Selection | Fund manager picks | Passive replication |
Risk | Varies by fund | Market risk only |
Goal | Beat the benchmark | Match the benchmark |
When Index Funds Make Sense
Unlike large caps where index funds often match or beat active funds, small cap index funds face challenges:
Liquidity issues: Many stocks in the Smallcap 250 index have low trading volumes. Index funds must buy and sell at whatever price is available, potentially hurting returns.
No quality filter: Index funds own all 250 stocks regardless of quality. Active managers can avoid poor companies.
However, if you believe active managers can't consistently outperform, index funds offer low-cost exposure to the small cap segment.
Best Nifty Smallcap 250 Index Funds
Fund Name | Expense Ratio | AUM (₹ Cr) | Tracking Error |
|---|---|---|---|
Nippon India Nifty Smallcap 250 Index | 0.22% | 2,670 | Low |
Motilal Oswal Nifty Smallcap 250 Index | 0.24% | 1,850 | Low |
UTI Nifty Smallcap 250 Index | 0.25% | 1,200 | Low |
HDFC Nifty Smallcap 250 Index | 0.30% | 890 | Low |
SBI Nifty Smallcap 250 Index | 0.28% | 950 | Low |
Data as of December 2025. Source: Groww
Our view: In small caps, active management has historically added value. Top funds like Quant (33%) and Nippon (28.5%) significantly outperform the index (26.7%). Consider a core active fund supplemented by index exposure if you want cost efficiency.
How Small Caps Behave in Different Markets
Understanding market cycle behavior helps set realistic expectations.
Bull Markets (2020-2021, Early 2024)
Small caps explode during risk-on rallies. Top funds delivered 50-90% returns in these periods. The post-COVID rally saw small cap funds double or triple investors' money.
Corrections (2022, 2024)
Small caps fall faster and harder. During the 2022 correction, small cap funds dropped 30-45% while large caps fell 15-25%. The 2024 correction showed similar patterns.
Recovery also varies. Quality small cap funds bounced back within 6-12 months. Lower quality funds took longer.
Sideways Markets
Small caps often underperform during prolonged sideways phases. Liquidity moves to large caps for safety. Patient investors who stayed invested eventually benefited when trends resumed.
Lesson for NRIs
If you can't stomach watching your portfolio drop 40% and still hold for 7-10 years, small caps aren't for you. These funds require emotional discipline more than analytical skill.
Sector Allocation: Where Small Cap Funds Invest
Understanding sector exposure helps avoid overconcentration across your portfolio.
Sector | Average Allocation | Why Funds Prefer This |
|---|---|---|
Financials | 15-22% | NBFCs, small banks, fintech enablers |
Healthcare | 12-17% | Hospital chains, pharma APIs, diagnostics |
Industrials | 12-18% | Capital goods, engineering, automation |
Consumer Discretionary | 10-15% | Retail, hospitality, auto ancillaries |
Technology | 8-12% | IT services, software products |
Chemicals | 6-10% | Specialty chemicals, agrochemicals |
Most small cap funds are overweight on financials and industrials. If you already own banking stocks or infrastructure mutual funds, check for overlap before adding small cap exposure.
👉 Tip: Use Belong's fund comparison tools to check portfolio overlap between your funds.
Taxation for NRIs on Small Cap Funds
Tax rules changed after July 23, 2024. Here's the updated structure for equity-oriented funds:
Capital Gains Tax
Holding Period | Tax Rate | Notes |
|---|---|---|
Less than 12 months (STCG) | 20% | Increased from 15% in July 2024 |
More than 12 months (LTCG) | 12.5% on gains above ₹1.25L | Increased from 10% above ₹1L |
TDS Deduction
Banks and AMCs deduct TDS on redemptions:
- STCG: 20% TDS
- LTCG: 12.5% TDS on gains exceeding ₹1.25 lakh
You can claim refunds by filing ITR if TDS exceeds actual liability.
Tax Optimization Strategies
Harvest gains strategically. Redeem up to ₹1.25 lakh in gains each financial year tax-free. Split larger redemptions across two financial years (March and April) to use exemptions twice.
Hold for minimum 12 months. The difference between 20% STCG and 12.5% LTCG is significant. On ₹5 lakh gains, that's ₹37,500 saved.
Consider DTAA benefits. UAE doesn't tax capital gains. Proper documentation may provide relief under the Double Taxation Avoidance Agreement.
For detailed tax guidance, use our NRI tax filing service.
A Smarter Alternative: GIFT City Funds
Here's what most NRIs don't know: GIFT City mutual funds offer potentially tax-free returns for UAE residents.
Under Section 10(4D) of the Income Tax Act, capital gains from GIFT City funds are exempt from Indian tax. Combined with UAE's zero-tax environment, you effectively pay 0% on investment gains.
Regular vs GIFT City: A Comparison
Parameter | Regular Small Cap Fund | GIFT City Alternative |
|---|---|---|
STCG Tax | 20% | 0% (for UAE NRIs) |
LTCG Tax | 12.5% above ₹1.25L | 0% (for UAE NRIs) |
Currency | INR | USD |
TDS | Yes | No |
Rupee Risk | Fully exposed | Protected |
Repatriation | Via NRE/NRO | Fully repatriable |
The Tax Savings Math
Invest ₹30 lakh in a small cap fund earning 25% annually for 10 years:
- Regular fund: Corpus ₹2.79 crore, Tax on gains ~₹31L = Net ₹2.48 crore
- GIFT City: Corpus ₹2.79 crore, Tax = ₹0 = Net ₹2.79 crore
That's ₹31+ lakh saved purely through tax efficiency on a relatively modest investment.
Explore options through our GIFT City mutual funds explorer. Funds like DSP Global Equity Fund and Tata India Dynamic Equity Fund offer diversified exposure with tax advantages.
How to Select the Right Small Cap Fund
With 30+ options, choosing can feel overwhelming. Here's a framework:
Step 1: Assess Your Risk Tolerance
Risk Profile | Recommended Approach |
|---|---|
Moderate-High | Diversified funds with 150+ stocks (Nippon, HDFC) |
Very High | Concentrated, high-conviction funds (Quant) |
Cost-Focused | Low expense options (Bandhan, Tata) |
Passive | Nifty Smallcap 250 Index Funds |
Step 2: Check Consistency, Not Just Returns
Don't just look at 5-year trailing returns. Evaluate:
Rolling returns: How has the fund performed across various 3-year periods? Downside capture: How much did it fall relative to benchmark during corrections? Alpha: Does the fund consistently generate returns above its benchmark?
Step 3: Evaluate Fund Manager Tenure
Small cap stock selection requires deep research and ground-level knowledge. Fund managers with 5+ years tenure at the same fund understand their portfolio companies intimately.
Samir Rachh has managed Nippon India Small Cap since 2010. Chirag Setalvad has led HDFC Small Cap since 2014. This continuity matters.
Step 4: Consider Portfolio Overlap
If you own mid cap funds or flexi cap funds, check if they hold the same small cap stocks. Duplication reduces diversification benefits.
Model Portfolios for Different Goals
Conservative Approach (First-Time Small Cap Investor)
Allocation | Fund Type | Example |
|---|---|---|
50% | ICICI Prudential Bluechip | |
30% | HDFC Mid Cap Fund | |
10% | Small Cap (Diversified) | Nippon India Small Cap |
10% | ICICI Pru Balanced Advantage |
Expected returns: 16-20% with moderate volatility
Growth Approach (Experienced Investor, 10+ Year Horizon)
Allocation | Fund Type | Example |
|---|---|---|
30% | Parag Parikh Flexi Cap | |
30% | Edelweiss Mid Cap Fund | |
25% | Small Cap (Active) | Bandhan Small Cap Fund |
15% | Small Cap Index | Nippon India Smallcap 250 Index |
Expected returns: 20-26% with higher volatility
Aggressive Approach (High Risk Tolerance, 15+ Year Horizon)
Allocation | Fund Type | Example |
|---|---|---|
40% | Small Cap (High Conviction) | Quant Small Cap Fund |
30% | Motilal Oswal Midcap Fund | |
20% | Infrastructure/Manufacturing | |
10% | DSP Global Equity |
Expected returns: 24-32% with significant volatility
How to Invest in Small Cap Funds as an NRI
Step 1: Complete KYC
You'll need:
- PAN card
- Passport with valid visa
- Overseas address proof
- Passport-size photograph
Most AMCs offer video KYC for remote completion from the UAE.
Step 2: Link Your Bank Account
Open an NRE or NRO account with an Indian bank:
- NRE: Full repatriation of principal and gains
- NRO: ₹1 million annual repatriation limit
Compare options using our NRI FD rates tool to find banks with the best NRI services.
Step 3: Start with SIP, Not Lump Sum
Given small cap volatility, SIP (Systematic Investment Plan) works better than lump sum for most investors.
A ₹25,000 monthly SIP for 5 years in Motilal Oswal Small Cap grew to ₹33.3 lakh on ₹15 lakh invested, according to Zee Business data. SIP averages out purchase prices across market cycles.
Step 4: Choose Direct Plans
Always select Direct plans to avoid distributor commissions. This saves 0.5-1% annually, which compounds significantly over 15-20 years.
Common Mistakes to Avoid
1. Investing Based on Last Year's Topper
The fund that gave 50% last year might give -10% next year. Small caps are cyclical. Look at rolling 3-5 year returns across multiple periods, not just trailing returns.
2. Putting Too Much in Small Caps
Many NRIs go all-in on small caps after seeing headline returns. Then corrections hit and they panic-sell at the worst time. Limit small cap allocation to 15-20% of your equity portfolio.
3. Redeeming During Corrections
Small cap funds can fall 35-50% during market corrections. If you redeem in panic, you lock in losses. Stay invested for 10+ years minimum.
4. Ignoring Fund Size
A ₹70,000 crore small cap fund (like Nippon) faces different challenges than a ₹5,000 crore fund. Very large funds may drift toward mid caps to deploy capital.
5. Chasing New Fund Offers
NFOs in small cap space have proliferated. New funds lack track records. Stick to established funds with 5+ years of performance data unless you have specific conviction.
6. Ignoring Tax-Efficient Alternatives
UAE NRIs paying 12.5-20% tax on mutual fund gains unnecessarily. Explore GIFT City funds for potentially tax-free returns.
When Should You Avoid Small Cap Funds?
Small caps aren't for everyone. Consider alternatives if:
You need funds within 7 years.
Small caps can remain underwater for 3-5 years during prolonged corrections. Choose debt funds or balanced advantage funds instead.
You can't tolerate 40%+ drawdowns.
If watching your portfolio fall by nearly half would trigger panic selling, stick to large caps or conservative hybrid funds.
Your equity allocation already exceeds 70%.
Adding more small caps increases portfolio risk disproportionately. Consider rebalancing toward fixed income or gold.
You're within 5 years of retirement.
If you plan to return to India soon, reduce small cap exposure gradually. Shift toward stable income-generating investments.
You check your portfolio daily.
Small caps' daily volatility can cause emotional decisions. If you can't ignore short-term movements, choose less volatile options.
Take Your Next Step
Small cap funds offer compelling wealth-building potential for patient, disciplined investors. Whether you choose high-conviction active funds or low-cost index options, the key is starting early, staying invested through cycles, and maintaining realistic expectations.
Use Belong's NRI FD Comparison Tool to explore stable alternatives for the conservative portion of your portfolio. Check your residential status to understand tax implications correctly.
For tax-efficient equity exposure, explore GIFT City mutual funds that offer potentially zero tax on capital gains for UAE residents.
Have questions about which small cap fund fits your situation? Join our WhatsApp community where many NRIs discuss their investment strategies daily. Or download the Belong app to start investing in tax-efficient GIFT City products.
Disclaimer: Mutual fund investments are subject to market risks. Past performance does not guarantee future returns. Small cap funds are particularly volatile and can lose 40%+ during corrections. Rankings in this article use transparent criteria (5-year returns, AUM, expense ratio) and should not be considered investment recommendations. Consult a SEBI-registered advisor before investing.
Sources
- AMFI - Association of Mutual Funds in India
- SEBI - Securities and Exchange Board of India
- Groww Small Cap Funds
- Value Research Online
- Tickertape Fund Analysis
- INDmoney Research
- Upstox - Expense Ratio Comparison
- Zee Business - SIP Returns Analysis
- JezzMoney - Small Cap Research
- NSE India - Index Data
