January 15, 2026 - Updated on May 22, 2026
Investors who begin exploring equity funds for long-term growth eventually come across the appeal of small caps. These are companies still in the early stages of their journey, where business models evolve, market share shifts, and growth potential can unfold faster than in larger, more established firms. That’s why the search for the best small-cap mutual funds gradually becomes part of every investor’s learning curve.
A small-cap fund invests mainly in small-sized companies. These companies are generally ranked 251st or lower by market capitalisation. They are smaller in scale, both in revenue and profit, and naturally carry more business uncertainty. That makes their stock prices more volatile. This makes the category more suitable for long-term investors who can handle periods of higher volatility.
The mandate of a small-cap fund is straightforward. As per the guidelines of the Securities and Exchange Board of India, small-cap schemes must invest at least 65% of their assets under management (AUM) in small-cap stocks at all times. This rule ensures the fund stays true to its category. The remaining portion can move into mid-caps, large caps, or even cash equivalents.
This gives fund managers some room to manage risk when valuations run high or markets turn uncertain. With this understanding, here are two of the better-performing small-cap funds that investors often consider.
Bandhan Small Cap Fund launched in February 2020 and has grown steadily since then. This is among the top small-cap mutual funds and is managed by Manish Gunwani, Head of Equities at Bandhan Asset Management Company (AMC), who has over 28 years of experience.
Before his current role, Manish was the Chief Investment Officer- Equities at Nippon India Mutual Fund, managing equity assets of over ₹1.2 lakh crores. He also made big contributions at ICICI Prudential AMC as the Deputy CIO (Equities), where he was instrumental in growing two flagship funds to a total AUM exceeding ₹35,000 crores.
His deep experience is reflected in the fund’s performance. As of October 2025, it manages an AUM of ₹17,380 crore, reflecting growing investor interest in the category. The fund’s expense ratio (direct plan) is 0.4%, and it trades at a lower Price-to-Earnings (P/E) multiple of 19.28.
The fund’s approach is centred on long-term capital appreciation through a portfolio of high-quality small-cap businesses. The scheme’s current allocation is 89.01% in Equity, 0.07% in Debt, and 10.92% in cash and cash equivalents.
Its portfolio allocation is 43.9% in small-cap stocks, 43.7% in mid-caps, 8.4% in large-caps, and 3.8% in giants. The average market cap of the portfolio is ₹15,525 crore. One notable characteristic of this fund is its wide diversification.
It holds 228 stocks, of which the top 10 account for 18.99% of the portfolio. Sobha has the highest individual weighting at 3.40%, followed by REC (2.72%), South Indian Bank (2.24%), LT Foods (2.18%), and Cholamandalam Financial (1.55%).
The sector mix remains broad, with the scheme heavily invested in financials (22.13%), followed by consumer discretionary (13.39%), healthcare (11.24%), materials (10.99%), and industrials (8.47%).
The fund maintains a low turnover rate of 26%, significantly below the category average. This indicates a steady, conviction-led approach rather than frequent portfolio reshuffling. Performance has also been encouraging, too.
Over the last five years, this small-cap mutual fund’s returns have compounded at 33.06% annually, a performance that stands well above the BSE Smallcap 250 TRI, which returned 28.46% over the same period. This makes it one of the top-performing small-cap mutual funds.
From a risk perspective, the fund shows slightly lower volatility with a standard deviation of 17.86%, compared to 18.8% of the benchmark. Standard deviation measures how volatile a fund’s returns can be, so a lower number indicates less volatility.
Where the fund stands out is downside protection. Its Sortino ratio is 1.93, higher than the benchmark’s 1.25. A higher Sortino ratio means the fund generates better returns for every unit of downside risk it takes.
On an overall risk-adjusted basis, the fund shows strength, with a Sharpe ratio of 1.26, well above the benchmark’s 0.84. A higher Sharpe ratio means the fund is delivering more return for the total risk taken.
Mirae Small Cap Fund is among the newly launched Small-cap mutual funds, launched on 31 January 2025. The fund is from Mirae Asset Mutual Fund, known for its robust fund management and relatively strong, consistent performance across its product offerings.
This fund is managed by Varun Goel, with prior experience with Nippon India Mutual Fund, Motilal Oswal AMC, Karvy Stock Broking and KC Portfolio Management. As of October 2025, it manages an AUM of ₹2,729 crore and has an expense ratio of 0.32%.
The scheme aims to generate capital appreciation by predominantly investing in small-cap stocks. From time to time, the fund manager will also seek participation in other equity and equity-related securities to achieve optimal portfolio construction.
The scheme’s current allocation is 94.87% in Equity, and 5.13% in cash and cash equivalents. Its portfolio allocation is 23.17% in small-cap stocks, mid-caps (59.14%), large-caps (7.97%), and giants (9.72%). The portfolio’s average market cap stands at ₹27,571 crore, and the fund trades at a P/E of 29.21.
It holds a portfolio of 77 stocks, of which the top 10 account for 22.61%. Karur Vysya Bank has the highest individual weighting at 3.12%, followed by Cholamandalam Financial (2.98%), Godawari Power (2.43%), Welspun (2.43%), and Motherson Wiring (1.98%).
The sector mix remains broad, with the scheme heavily invested in financials (22.87%), followed by Industries (19.56%), Consumer Discretionary (14.17%), Healthcare (13.53%), and Materials (13.06%).
In the last six months, the fund has delivered an absolute return of 8.19%, outpacing the Benchmark NSE Smallcap 250 TRI.
Small-cap mutual funds can play a meaningful role in long-term wealth creation, but they demand patience and a higher tolerance for volatility. At Mutual Fund Wala, Bandhan Small-Cap Fund stands out with a solid track record, experienced management, and strong risk-adjusted performance.
Mirae Asset Small-Cap Fund, though relatively new, benefits from the strength of a reputed fund house and a well-diversified portfolio. For investors associated with Mutual Fund Wala who can stay invested for the long haul and handle market swings, these funds offer a structured way to participate in the growth of early-stage businesses across the small-cap universe.
Ans: Small-cap mutual funds invest primarily in small companies, typically those ranked 251st or lower by market capitalisation. SEBI mandates that these funds must invest at least 65% of their assets in small-cap stocks.
Ans: These funds suit long-term investors who can handle sharp market ups and downs. If you have a horizon of at least 5–7 years and can stay invested during volatile phases, small-caps can add meaningful growth to your portfolio.
Ans: Small-cap companies are younger, smaller in revenue and profit, and more sensitive to business cycles. Their stock prices tend to move sharply in both directions, which increases short-term risk. However, the long-term growth potential can be rewarding if held patiently.
Ans: Look at the fund manager’s experience, diversification, risk metrics (standard deviation, Sharpe, Sortino ratios), long-term performance (preferably 5+ years), and how consistently the fund beat the benchmark and its category. Avoid selecting these funds purely based on recent returns.
Ans: They are best used as a satellite allocation rather than the core. Most investors allocate 10–20% of their equity to small caps, depending on their risk capacity. A disciplined SIP approach can also help average out volatility.
About the Author
Mr Shashi Kant Bahl
Mr. Shashi Kant Bahl is a mutual fund professional with nearly 20 years of experience in the financial services industry. Since 2005, he has helped over 10,000 investors manage their mutual fund investments and build long-term wealth. His firm currently manages assets of over ₹734 crore (AUM).
Disclaimer: Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.
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