Introduction to Small Cap Mutual Funds

Investing in small-cap mutual funds has become increasingly popular among savvy investors looking to capitalize on the high growth potential of smaller companies. These funds, as mandated by the Securities and Exchange Board of India (SEBI), invest at least 65% of their assets in equities of companies ranked 251 and beyond on the stock exchange[3]. The past few years have seen a significant rise in investments in these funds, especially with a notable increase from Rs. 4,667.70 crore in December 2024 to Rs. 5,720.87 crore in January 2025, marking a 22.6% month-over-month growth[1].

Spotlight on Quant Small Cap Fund

Among the best-performing small-cap mutual funds for 2025 is the Quant Small Cap Fund, which has consistently delivered exceptional returns. Launched on November 24, 1996, this fund has an impressive asset under management (AUM) of approximately Rs. 23,268 crore as of January 2025[1]. Its three-year rolling return stands at a remarkable 41%, significantly outperforming its benchmark[1].

Performance and Stability

• Outstanding Returns: The Quant Small Cap Fund has shown remarkable resilience with its returns, offering a 41% return over the past three years and a 33% average return over the past five years, consistently beating its benchmark[1].
• Consistency and Long-Term Growth: Long-term investments in this fund have proven lucrative. For example, if an investor had started a systematic investment plan (SIP) with Rs. 3,000 per month three years ago, their total investment would have grown to approximately Rs. 1,36,328 by now[1].
• Diversification and Risk Management: Despite investing primarily in small-cap stocks, the fund's diversification strategy helps manage risk, making it a stable choice for long-term investors.

Key Features of Small Cap Mutual Funds

Benefits and Risks

• High Growth Potential: Small-cap mutual funds offer higher returns compared to large-cap funds. Over the past five years, they have delivered a compound annual growth rate (CAGR) of about 37.03%, outperforming large-cap funds by 12.70%[2].
• Volatility: These funds are more susceptible to market fluctuations due to their investment in smaller companies. However, long-term investments can mitigate this risk[3].
• Taxation: The returns from small-cap mutual funds are taxed similarly to other equity-oriented investments. Short-term capital gains are taxed at 20%, while long-term gains exceeding Rs. 1.25 lakh per financial year are taxed at 12.5%[3].

Portfolio Composition

• SEBI Guidelines: Small-cap mutual funds must invest at least 65% of their assets in small-cap stocks[2].
• Diversification: While focusing on small-cap stocks, some funds may also allocate a small percentage to mid-cap or large-cap stocks to balance their portfolios[3].

Top Small-Cap Mutual Funds for 2025

Some of the best small-cap mutual funds in 2025 include:

• Edelweiss Small Cap Fund: Known for its high returns and consistency.
• Tata Small Cap Fund: Offers robust growth with a well-diversified portfolio.
• Invesco India Small Cap Fund: Has shown steady performance over the years.

Investment Strategies

• Systematic Investment Plans (SIPs): A good way to invest regularly and reduce timing risks.
• Long-Term Horizon: Essential for maximizing returns while minimizing volatility risks.

Conclusion

The Quant Small Cap Fund stands out due to its exceptional performance, diversification, and long-term growth potential. However, it's crucial for investors to understand the risks associated with small-cap mutual funds and maintain a long-term investment horizon to reap the benefits.

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