Investment Options: Highlighting the Top 3 Small-Cap Mutual Funds Ideal for Systematic Investment Plan (SIP) Contributors
The world of investing has seen a surge in interest towards small cap funds, with several funds showing impressive long-term performance. Among these, the Bandhan Small Cap Fund and the Nippon India Small Cap Fund stand out.
Launched in February 2020 and September 2010 respectively, both funds have attracted substantial assets under management (AUM). As of July 2025, the Bandhan Small Cap Fund boasts an AUM of over Rs 140 billion, while the Nippon India Small Cap Fund manages assets worth over Rs 659 billion.
These funds follow a diversified approach, focusing on smallcap companies selected through a bottom-up investment strategy. The Bandhan Small Cap Fund, for instance, prioritizes quality, growth, and valuations when investing in smallcaps. It also has the mandate to invest up to 35% of its total assets in overseas equities and up to 50% in equity derivatives for non-hedging purposes. On the other hand, the Nippon India Small Cap Fund invests in quality stocks, holds them with a long-term view, and seeks small-sized companies with high-growth potential that are available at relatively attractive valuations.
The Nippon India Small Cap Fund's stock selection is guided by Invesco's internal proprietary stock categorisation framework, which includes parameters like revenue growth, EBITDA margin, ROE, and valuations of assets.
Small caps comprise a significant portion of these funds' portfolios. For the Bandhan Small Cap Fund, small caps account for 64.8%, while midcaps and largecaps make up 26.7% and 6% respectively. The Nippon India Small Cap Fund, on the other hand, holds 68.1% in smallcaps. The top 10 stocks comprise 13.8% and 32.1% of the Bandhan and Nippon India Small Cap Funds' portfolios respectively.
Small cap funds may be considered for an aggressive investor's satellite portfolio, given their placement at the higher end of the risk-return spectrum of diversified equity funds. However, they require a long-term investment horizon of at least 8-10 years.
Over a 5-year period, the Invesco India Small Cap Fund has delivered a XIRR or SIP return of 27.58%, outperforming the Nifty Smallcap 250 - TRI. The portfolio turnover ratio of the fund has ranged between 30-55%, indicating a long-term investment approach.
Individual investors, both retail and HNI, have developed a keen interest in small caps, as shown by the inflows data released by AMFI. Approximately 2.5% of the fund's assets are held in cash & cash equivalents.
In addition to the Bandhan Small Cap Fund and the Nippon India Small Cap Fund, other top Indian small-cap SIP funds with strong long-term performance and favorable risk profiles include SBI Small Cap Fund and HDFC Small Cap Fund.
The Nifty Smallcap 250 - Total Return Index (TRI) has clocked a compounded average growth rate (CAGR) of 28.1% over the last five years, outperforming the midcap and the largecap index. This growth has further fuelled the interest in small cap funds.
In conclusion, small cap funds offer a promising avenue for long-term growth-oriented investors. However, as with any investment, it's crucial to understand the risks involved and consult with a financial advisor before making investment decisions.
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