Within the stock market, small‑cap funds are these thrilling, high‑potential players in your investment strategy. Over the past 5 years, small-cap funds have delivered attractive returns with over 30% CAGR annualised returns.
But this year has been a rough ride, with some market falls wiping out the gains. So, are small-cap funds still worth chasing? Or are they losing the shine? In this guide, let’s understand it with data and see what it really suggests.
What are Small Cap Funds?
Small‑cap funds are mutual funds that invest in small companies that typically rank below the top 250 in terms of market capitalization. As per SEBI rules, small-cap funds must put at least 65% of their money into small-cap stocks.
Best small cap mutual funds pick small companies because these firms are often in early growth stages with big upside potential. They’re rising startups or niche companies that have the potential to become tomorrow’s mid or large-caps.
The traits of a small company are that they have the potential for big growth. Small firms can skyrocket if they succeed, so small-cap funds can deliver strong returns. These stocks also swing extremely, both up and down. Moreover, small‑cap funds are more volatile than large‑cap funds, so you need to be ready for sharp dips. Some of the popular small-cap funds in India include Axis Small Cap Fund, Quant Small Cap Fund, Bandhan Small Cap Fund, Invesco India Small Cap Fund, etc.
What Went Down in 2025?
In 2025 so far, India’s small‑cap mutual funds posted average losses of around 11.7%, with the worst‑hit fund down 17.8%. It’s almost as if you bought a new phone for ₹30,000 and saw it lose ₹3,500 value within a few months.
There are a few reasons that explain this fall: stretched valuations, global inflation worries, and geopolitical tensions like the recent tensions between India and Pakistan. This made investors and fund managers nervous, especially with markets trading near highs.
While small‑cap funds have stumbled this year, over 5-10 years, they’re still rock stars. On average, small‑cap funds delivered around 30% per annum in 2024, and 5‑year returns of many small-cap funds hovered around 200% more recently.
Moreover, while the small-cap funds seemed to lose their shine in the initial months of 2025, they caught up and got an inflow of ₹3,999 crore in April 2025 and an inflow of ₹3,214 crore in May 2025.
This tells us that while investors might be panicking due to broader market fluctuations, small-cap funds are still holding up and have proved to outshine in the long run.
The Risk‑Reward Balance: Should You Invest?
Small‑caps are naturally jittery as they come with more ups and downs than large caps. But volatility also brings bargain chances, and over time, it can pay off in the long run.
Small‑caps are also young companies that are growing. They can either grow fast or flop. But over time, many small-cap companies become mid‑caps or even large‑caps. Think of it like showing faith in a child musician who goes global one day.
Timing is everything when you’re deciding whether you should continue to invest in small-cap funds or not. If you’re in for the long haul (5–10 years), small‑caps continue to look strong, as data has also shown impressive multi‑year returns across top funds.
That said, it’s smart to only put a small portion of your portfolio into small-cap funds, maybe 10–20%. Use SIPs and spread your entries out. That way, you don’t panic‑sell during downturns.
Conclusion
Yes, small‑cap funds have gone through a rough patch in 2025. But over the long term, they’ve shown they can shine bright with stellar returns. If you don’t get scared by market swings and want to keep investing for a few years, there’s still a serious upside to investing in small-cap funds, especially if you use a smart plan like SIPs and stagger investments.
Small‑caps aren’t for everyone, but if you’re patient and keep a cool head, the data says they still have glitter left. Happy investing!
Luys Parker