Explore the top-performing small-cap mutual funds to start your SIP in 2025. Get performance data, comparison, and expert advice for smart investing.
Introduction: Why Small Cap SIP Funds Are Gaining Popularity
Investing in mutual funds has become one of the most popular ways to build wealth, and small-cap funds are increasingly attracting attention from investors seeking high growth. These funds invest in companies ranked beyond the top 250 by market capitalization, which means they are smaller in size but offer enormous growth potential. While small-cap funds are highly volatile in the short term, they tend to outperform large and mid-cap funds when held for a longer duration. By combining them with Systematic Investment Plans (SIPs), investors can benefit from rupee cost averaging and compounding.
What Are Small Cap Mutual Funds?
Small-cap mutual funds are equity-oriented schemes that allocate at least 65% of their corpus to small-cap companies. As per SEBI’s categorisation, small-cap companies are those ranked 251st and beyond in terms of market capitalization. These businesses typically operate in niche markets and have significant room for growth, which makes small-cap funds an ideal choice for investors who are willing to take on higher risk for potentially higher returns.
Why Choose SIP for Small-Cap Funds?
SIP offers several advantages when investing in small-cap funds. The most important benefit is rupee cost averaging, which ensures that you buy more units when prices are low and fewer units when prices are high.This helps lower the total investment cost gradually over time. SIP also encourages discipline in investing, as it requires regular contributions, making it easier for investors to stay on track. Another major benefit is the power of compounding, which multiplies wealth over time if you remain invested for 10 years or more. Finally, SIP minimizes timing risk, which is crucial for volatile categories like small-cap funds.
Factors to Consider Before Investing in Small-Cap Funds
Before you select a small-cap fund for your SIP, there are key factors to analyze. Check the historical performance of the fund over the last 5-10 years, as short-term returns can be misleading. The fund manager’s track record is equally important because managing small-cap portfolios requires expertise. Also, review the expense ratio, as lower costs translate into better long-term returns. Look for portfolio diversification across sectors, as a concentrated portfolio increases risk. Finally, choose a fund that has shown consistency and stability in returns compared to its peers.
Top 5 Small Cap Funds for SIP in 2025
Here are the best-performing small-cap mutual funds in India for 2025, based on long-term performance, fund management quality, and growth potential:
1. Quant Small Cap Fund
Quant Small Cap Fund has become a top performer in the small-cap category. With an approximate AUM of ₹25,000 crore, the fund has delivered an outstanding 5-year CAGR of around 35% and a 10-year CAGR of nearly 28%. It follows a dynamic sector allocation strategy, which helps reduce risk during volatile periods while maintaining high returns. Investors with an aggressive risk appetite and a long-term horizon of 7-10 years can consider this fund.
2. Nippon India Small Cap Fund
Nippon India Small Cap Fund is one of the oldest and most trusted small-cap funds in India. It boasts an AUM of ₹50,000 crore and has shown consistent performance over the years. With a 5-year CAGR of approximately 28% and a 10-year CAGR of 23%, it is a strong contender in this space. The fund invests in quality small-cap stocks with robust fundamentals and high growth potential, making it a reliable choice for SIP investors seeking stability and proven returns.
3. Bandhan Small Cap Fund
Bandhan Small Cap Fund is a relatively newer entrant but has delivered impressive returns in recent years. With an AUM of ₹6,000 crore, it has generated a 3-year CAGR of nearly 24%. The fund primarily focuses on companies with strong fundamentals and future growth prospects, making it a great option for investors who can take moderate to high risk and have an investment horizon of at least five years.
4. Tata Small Cap Fund
Tata Small Cap Fund is known for its strategy of identifying undervalued small-cap stocks that have the potential for high growth. With an AUM of ₹8,000 crore and a 5-year CAGR of about 26%, the fund has delivered strong performance and consistent alpha generation. It is an ideal option for investors seeking diversification and steady long-term returns.
5. HDFC Small Cap Fund
HDFC Small Cap Fund is considered among the most reliable options in the small-cap segment. With an AUM of ₹22,000 crore and a 5-year CAGR of 24%, the fund has maintained a strong track record. It follows a value-oriented investment approach and is managed by an experienced team that prioritizes risk management. This makes it suitable for conservative investors who want exposure to small caps but with relatively lower volatility.
Also Read : How to Invest in SIP (Systematic Investment Plan)? – A Complete Beginner’s Guide
Comparison of Top 5 Small Cap Funds (2025)
| Comparison of Top 5 Small Cap Funds (2025) | |||
| Fund Name | AUM (₹ Cr) | 5-Year CAGR | Expense Ratio |
| Quant Small Cap Fund | 25,000 | 35% | 0.76% |
| Nippon India Small Cap | 50,000 | 28% | 0.72% |
| Bandhan Small Cap Fund | 6,000 | 24% | 0.74% |
| Tata Small Cap Fund | 8,000 | 26% | 0.79% |
| HDFC Small Cap Fund | 22,000 | 24% | 0.77% |
How to Choose the Best Small-Cap Fund for SIP
Selecting the right fund involves more than just looking at past returns. Investors must evaluate their risk appetite, investment goals, and time horizon. Small-cap funds are best suited for long-term wealth creation and are not appropriate for short-term financial goals. Investors should allocate only 10-15% of their equity portfolio to small-cap funds and maintain diversification across large-cap and mid-cap funds.
Risks in Small-Cap Funds and How to Manage Them
Small-cap funds are highly volatile and can experience sharp price fluctuations. Liquidity risk is another concern since small-cap stocks typically have low trading volumes, which can make exits difficult during market downturns. Moreover, small caps tend to fall more than large caps during economic slowdowns. To manage these risks, investors should stay invested for 7-10 years, avoid lump-sum investments, and prefer SIP to average out costs during market volatility.
Should You Invest in Small-Cap SIP Funds in 2025?
Yes, provided you meet the right conditions. If you have a long-term investment horizon of at least 7-10 years, can handle short-term volatility, and are disciplined enough to continue SIP during market corrections, small-cap funds can help you achieve significant wealth creation. However, avoid overexposure and always maintain a balanced portfolio.
Also Read : Best Mutual Funds to Invest in 2025
Conclusion
Small-cap funds offer an excellent opportunity for investors aiming for high returns, but they come with higher risk. Among the top five funds for 2025, Quant Small Cap Fund and Nippon India Small Cap Fund lead the category due to their consistent track record and robust management. To maximize returns, start SIP early, stay disciplined, and maintain diversification in your portfolio.
FAQs
Q1. Are small-cap funds risky?
Yes, small-cap funds carry high risk due to volatility, but they can deliver superior returns over the long term.
Q2. What is the ideal investment horizon for small-cap funds?
A minimum of 7-10 years is recommended.
Q3. Can I start a SIP in small-cap funds with ₹500?
Yes, most funds allow SIPs starting from ₹500.
Q4. Which is better for small-cap funds: SIP or lump sum?
SIP is better as it averages out market volatility.
Q5. Are small-cap funds better than mid-cap funds?
Small-cap funds have the potential to generate higher returns than mid-cap funds, but they also carry a greater level of risk.
Disclaimer: The investment tips and opinions given here are the personal opinions of experts. These are not the opinions of Riskydollar or its team. Riskydollar advises all readers to consult a certified financial advisor before making any investment
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