Small cap mutual funds have captured investor attention for their potential to deliver high returns over long investment horizons. Unlike large cap funds that invest in well-established firms, small cap funds focus on companies with smaller market capitalizations. These companies often operate in emerging industries or niche sectors, offering scope for rapid growth as they scale. However, higher return potential comes with higher risk and volatility, making small cap funds best suited for investors with a long-term horizon and higher risk tolerance.
This article explains what small cap mutual funds are, how to evaluate them, and highlights some of the best small cap funds to consider in 2026.
What are Small Cap Mutual Funds?
Small cap mutual funds are equity schemes that invest predominantly in small cap companies. These are firms that are behind the largest market capitalization companies in the stock market hierarchy. In India, this typically means companies ranked beyond the top 250 by market capitalisation. Small cap funds must maintain a minimum 65% of their portfolio in these smaller companies, which gives them distinct characteristics:
- Growth-oriented exposure: Small companies have untapped potential and can grow faster than mature large caps.
- Volatility: Price swings can be larger, especially in short time frames due to lower liquidity and higher sensitivity to market sentiment.
- Longer time horizon recommended: Investing for 7–10+ years tends to smooth volatility and enhance compounded returns.
Small cap funds tend to outperform over long cycles when the overall market is expanding and economic fundamentals support growth. However, they can underperform during downturns as investors rotate into safer, larger companies.
Top Small Cap Mutual Funds for 2026
Below is a curated list of some of the best small cap mutual funds in India as of early 2026. These are not recommendations but a synthesis of market data to help with shortlisting and further research.
Bandhan Small Cap Fund
AUM: ₹18,990 Cr
Minimum Investment: SIP: ₹100 & Lumpsum: ₹1,000
Exit Load: 1% for redemption within 365 days
Investment Philosophy: Bandhan Small Cap Fund focuses on building a diversified portfolio on a 3-pronged stock selection approach of Quality, Growth and Reasonable Valuation. The fund predominantly runs with an absolute return thought process rather than a benchmark-centric one. The fund’s Top 10 stocks constitute less than 30% of the fund, with exposure across many different sectors to control liquidity and fundamental risk.
Performance Snapshot:
| Period | Return | Sharpe Ratio | Max Drawdown |
| 3 Year | 29.22% | 1.18 | -21.68% |
| 5 Year | 24.32% | 1.08 | -21.68% |
| 7 Year | – | – | – |
The fund has delivered strong returns over the 3-year and 5-year periods with Sharpe ratios above 1, indicating good risk-adjusted performance, while a maximum drawdown of 21.68% reflects the level of downside during market corrections.
Recommended Investment Horizon: 7 years
Motilal Oswal Small Cap Fund
AUM: ₹5,837 Cr
Minimum Investment: SIP: ₹500 & Lumpsum: ₹500
Exit Load: 1% for redemption within 365 days
Investment Philosophy: The fund follows Motilal Oswal AMC’s QGLP philosophy – i.e. invest in Quality businesses with reasonable Growth potential and with sufficient Longevity of that growth potential at a fair Price. The scheme follows an active investment style, seeking to invest in small cap companies with a strong competitive position or economic moat, good business prospects, run by a competent management. The fund practices a concentrated, high-conviction portfolio strategy with a low-churn, buy and hold approach to investing.
Performance Snapshot:
- Launched on 26 December 2023, the fund is still in the early stage of its lifecycle, with limited long-term performance data available.
- Since inception, it has delivered a return of 16.63%, despite operating in a volatile market environment.
- In calendar year 2024, the fund generated a return of 45.98%, significantly outperforming the benchmark BSE Smallcap’s return of 30.10%, reflecting strong stock selection.
- In calendar year 2025, the fund declined 5.32%, performing slightly better than the benchmark’s -6.01%, indicating relatively better downside management.
Overall, while longer performance history is still needed, the fund’s early benchmark outperformance makes it worth tracking for long-term small-cap investors with a high risk appetite.
Recommended Investment Horizon: at least 7 years
Quant Small Cap Fund
AUM: ₹29,785 Cr
Minimum Investment: SIP: ₹1,000 & Lumpsum: ₹5,000
Exit Load: 1% for redemption within 365 days
Investment Philosophy: The underlying theme driving the relative allocation of Quant Small Cap Fund is Quant Mutual Fund’s research ability to identify cross asset, cross market inflexion points. This quantitative approach is based on their proprietary VLRT framework, wherein they incorporate the full spectrum of data along deeper aspects related to the three axes of Valuation, Liquidity, and Risk appetite and view it in a dynamic setting – Time, thus, forming the multi-dimensional VLRT framework.
Performance Snapshot:
| Period | Return | Sharpe Ratio | Max Drawdown |
| 3 Year | 19.31% | 0.79 | -23.87% |
| 5 Year | 27.92% | 1.15 | -23.87% |
| 7 Year | 25.70% | – | – |
The 5-year return of 27.92%, supported by a Sharpe ratio of 1.15, reflects strong risk-adjusted returns across market cycles, while the maximum drawdown of 23.87% highlights the level of volatility investors must be prepared for in a small-cap fund. The 3-year return of 19.31% indicates steady participation despite market corrections, and the sustained 7-year return of 25.70% underscores the fund’s ability to compound wealth over time for investors with a high risk appetite and a long investment horizon.
Recommended Investment Horizon: 7-10 years
Tata Small Cap Fund
AUM: ₹11,324 Cr
Minimum Investment: SIP: ₹100 & Lumpsum: ₹5,000
Exit Load: 0.5% for redemption within 30 days
Investment Philosophy: Tata Small Cap Fund’s investment philosophy is to identify companies which may grow in terms of profitability and cash flows with strong balance sheets where business can surprise the markets over a period in terms of delivery of earnings which in turn can lead to rerating of valuations. Essential characteristics of stocks picked as compounders are earnings growth, low debt and high free cash flows. The fund maintains adequate cash levels at all times to accommodate for redemptions.
Performance Snapshot:
| Period | Return | Sharpe Ratio | Max Drawdown |
| 3 Year | 14.19% | 0.57 | -22.73% |
| 5 Year | 22.03% | 1.01 | -22.73% |
| 7 Year | 19.37% | – | – |
The fund has delivered strong long-term performance, with a 5-year return of 22.03% and a Sharpe ratio of 1.01, reflecting decent risk-adjusted returns. A maximum drawdown of -22.73% highlights potential volatility, while the 3-year return of 14.19% and 7-year return of 19.37% demonstrate its ability to generate wealth over the long term.
Recommended Investment Horizon: 7 years
Invesco India Smallcap Fund
AUM: ₹9,225 Cr
Minimum Investment: SIP: ₹500 & Lumpsum: ₹1,000
Exit Load: For units in excess of 10% of the investment, 1% will be charged for redemption within 365 days
Investment Philosophy: Invesco India Small Cap Fund’s stocks selection is based on a bottom-up investment approach and guided by Invesco India’s proprietary stock
categorization framework. The fund has a bias for ‘Growth’ stocks and largely follows a fully
invested approach (~ 95% invested). The fund holds 30-50 stocks.
Performance Snapshot:
| Period | Return | Sharpe Ratio | Max Drawdown |
| 3 Year | 23.15% | 1.03 | -20.78% |
| 5 Year | 24.13% | 1.11 | -20.78% |
| 7 Year | 21.86% | – | – |
The fund has delivered strong returns with a 5-year return of 24.13% and a Sharpe ratio of 1.11 indicating good risk-adjusted performance. A maximum drawdown of -20.78% indicates better downside control than many peers, while the 3-year return of 23.15% and 7-year return of 21.86% show consistent long-term wealth creation.
Recommended Investment Horizon: 7 years
Structuring Your Small Cap Investment Strategy
Selecting the best smallcap mutual funds is only one part of the equation. The way you invest in them matters just as much. Here are practical steps for structuring your small cap exposure in 2026:
- Invest Through Systematic Investment Plans (SIPs): Due to volatility, deploying capital over time with SIPs smooths entry costs and reduces timing risk. SIP investing helps you avoid lump-sum timing mistakes.
- Long-Term Horizon: Experts generally recommend at least a 7–10 year horizon for small cap investments, letting compounding and business growth play out fully while weathering market cycles. A mutual fund consultant can help investors understand periods of uncertainty and stay committed to this horizon during volatility.
- Diversify Within the Equity Component: Rather than concentrating solely in small cap funds, blend them with large-cap or flexi-cap funds to balance risk and capture growth across the market spectrum.
- Rebalance Periodically: Markets evolve, and so should your allocation. Review your portfolio annually or semi-annually to rebalance if small cap exposure becomes disproportionately high. Many investors prefer to systematically manage their portfolio rebalancing through mutual fund consultants.
- Tax and Costs Awareness: Understand tax implications (for instance, capital gains taxation) and expense ratios. Lower costs over long durations compound into meaningful differences in your final corpus. A mutual fund advisor may help you understand and optimize the tax impact based on your holding period, tax slab, and applicable regime.
Risks and What to Watch For
Small cap investing is rewarding but inherently riskier than larger cap strategies. Key risks include:
- Higher market volatility: Small cap businesses are generally more vulnerable to changes in economic cycles, interest rates, funding conditions, etc. which can impact earnings stability and stock performance. Hence, small cap funds tend to experience more severe and prolonged drawdowns than large cap and mid cap funds.
- Managerial and execution risk: Performance in small cap funds depends heavily on stock selection and research quality. Changes in fund management, investment approach, or portfolio concentration can materially affect outcomes. These aspects are closely monitored by mutual fund advisors.
- Longer recovery periods: During market downturns, small cap funds may take longer to recover compared to large-cap funds, requiring investors to remain patient and invested through full market cycles.
- Suitability risk: Due to higher volatility, small cap mutual funds may not be suitable for short-term goals or conservative investors without the ability to tolerate interim losses. A mutual fund advisor can help investors understand their risk appetite and suitability via goal based planning.
These factors make investment discipline and risk assessment essential. Always align your small cap exposure with your risk tolerance and financial goals.
Conclusion
Small cap mutual funds remain compelling options for long-term investors seeking growth beyond traditional large-cap and balanced portfolios. However, successful small cap investing is not about chasing the absolute best returns from one year to the next, it is about selecting quality funds, maintaining discipline, and committing capital over time. With the right guidance from a mutual fund advisor, small cap exposure can become a powerful engine in a long-term wealth creation journey in 2026 and beyond.
Disclaimer: This article is intended for educational and informational purposes only and does not constitute financial or investment advice. Information presented is accurate as of January 2026 and is subject to change. Investments in mutual funds are subject to market risk, please read all scheme related documents carefully before investing.
