Best Small Cap Mutual Funds for 2025: High-Return Investment Picks

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Did you know how much Small Cap Mutual Funds rose in investments compared with January 2025 to December 2024? Yes, as of December 2024, investments in small cap funds were Rs.4,667.70 Crores whereas from January 2025 investments rose to Rs.5,720.87 Crores, a 22.6% month-over-month increase you see.

This brings you back to this post that lists the 5 best small cap mutual funds for 2025, giving a great opportunity to make high growth and become a part of the small cap rally.  

Now, without any further delays, let's see what makes this expert-picked scheme worth it by looking at their 3 and 5-year returns.

What are Small Cap Mutual Funds?

Small Cap Mutual Funds invest in small companies with a market value below the top 250 on the stock exchange. These companies have high growth potential but are riskier and more volatile. While small cap funds give you better returns when compared with Large Cap Mutual Funds, you must invest when you are ready to handle the risk that comes along with small cap mutual funds and your investment duration should be long such as 5 years at the minimum.

List of 5 Best Small Mutual Funds for 2025

Here are the 5 best-performing small cap mutual funds to invest in for high growth:

 * As on 09-03-2025

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Overview of Best Small Cap Mutual Funds to Invest for High Growth

Here are the 5 Best Small Cap Mutual Funds to invest in India to make yourself higher growth:

1. Bandhan Small Cap Fund

After being launched on 1 February 2020, the Bandhan Small Cap Fund has delivered 40.30% returns, most outstandingly beating its benchmark of 26.96% in just one year. This small-cap fund will be worth your investment if you plan to invest long-term. This fund will give safety within your portfolio and work towards creating long-term capital appreciation.

Let's take an example for a clear picture. Now, suppose you start a SIP of Rs.3000 for a duration of 3 years; this means the total amount invested by you would be Rs.1,08,000, on which, after making your net profits, your total portfolio will stand at Rs.1,54,329 Lakhs in today's date.

Pro Tip: Tired of second-guessing returns? Switch on to SIP Calculator to simplify the process.

2. Invesco India Small Cap Fund

The Invesco India Small Cap Fund, which launched on October 5, 2018, now manages Rs. 5,837 crore in investments. It has provided returns of 30.41% over the past 3 years and 30.27% over the past 5 years, making it a solid option for investors looking for a well-diversified portfolio with a mix of high-growth opportunities in emerging sectors.

If you had invested Rs.3,000 every month in this fund for the last 5 years, your total investment would have been Rs.1,80,000. However, today your portfolio would be worth Rs.3,18,552 Lakhs almost 2.3 times your original investment.

3. Tata Small Cap Fund

Launched on November 2, 2018, this mutual fund has delivered returns of 23.74% over the past 3 years, outperforming its benchmark of 27.1%. It's the top performer among the 3 Best Small Cap Funds for 2025 that have been analyzed. The fund uses a bottom-up strategy to identify strong companies with good growth potential.

If you had started a SIP of Rs.3,000 in this fund 5 years ago, your total investment would have been Rs.1,80,000. Today, the value of your investment would have grown to Rs.3,15,810, a significant gain.

Pro Tip: Level up your investment with Step Up SIP Calculator free of cost.

4. Edelweiss Small Cap Fund

Launched on 1st February 2019, the Edelweiss Small Cap Fund has given a great return of 33.58%, beating its benchmark of 27.74% in just three years. If you are thinking about investing for the long term, this fund could be a good option. It helps keep your Mutual Funds investments safe while aiming for strong growth over time.

Here’s an example to make it clearer: If you had started a SIP of Rs. 3,000 for 3 years, your total investment would have been Rs. 1,08,000. Today, after the returns, your portfolio would be worth Rs. 1,31,334 lakhs. That shows how much your money can grow with the Edelweiss Small Cap Fund.

5. Quant Small Cap Fund

The last amongst the best small cap mutual funds for 2025 is the Quant Small Cap Fund, which was launched on 24^th November 1996 by the Quant group. Now if you look at its last 3 years' performance, this small cap fund has delivered 41% returns outperforming its benchmark of 25.66% with good margins. Well, by looking further before, the quant small cap fund has given 33% average returns in the last 5-year time frame, once again beating its benchmark returns of 21.95% while its current AUM (Asset Under Management) stands at Rs.23,268 Crores as of 31.01.25.

This means, if you had started a SIP of Rs.3000 that too three years ago, the total amount invested by this time would be Rs.1,08,000 on which after your total gains, total investments would be worth Rs.1,36,328 lakhs.

Would Investing in Small Cap Funds in 2025 Make Sense?

Investing in small cap funds in 2025 could be a mix of good and bad. Small-cap stocks did really well last year, with some gaining over 35% and hitting record highs. But because of this big jump, small cap funds have become expensive, which means there’s less room for error if things go wrong.

Right now, the value of small-cap stocks compared to big companies (like those in the Sensex) is at a 10-year high. The last time this happened, was in 2018, the market saw a big crash in small-cap and Mid Cap Funds shortly after. So, there’s a chance that prices might drop again.

That said, not all small-cap stocks are risky. Some solid companies in this group still have the potential to grow even more. But you would need to pick carefully and think long-term because markets can go up and down a lot.

In simple terms, small cap mutual funds could be worth it in 2025, but you should be cautious, do your research and be prepared for both gains and losses.

Best Small Cap Mutual Funds Advantages

Small cap mutual funds have some great advantages for investors looking to grow their wealth:

1. High Growth Potential: Small companies can grow into mid-cap or even large-cap giants over time, offering significant growth opportunities for investors.
2. Higher Returns: Small cap stocks can deliver very high returns as they often start from a lower base and have room to expand rapidly.
3. Under-Researched Opportunities: Since many small-cap companies are less studied, they might offer hidden gems for investors willing to dig deeper.
4. Innovative and Niche Businesses: Small cap stocks often include companies working on unique, innovative or niche products, giving them an edge in untapped markets.
5. Wealth Creation Over Time: By investing in the best small cap mutual funds, you can add a powerful boost to your overall equity portfolio, creating wealth in the long term.

However, it is important to invest in the best small cap mutual funds with care, as giving you the potential for higher returns also involves high risk. Diversification and a long-term view can help manage this.

Why Are Small Caps Riskier?

Small cap stocks are riskier because they belong to smaller companies that are still growing. These companies are not as strong or stable as big businesses, making their stock prices go up and down more sharply.

Here is why small caps are riskier:

1. Big Price Swings: Small cap stocks have the potential to deliver high returns when the market is good but they also fall more when things go bad. This makes them unpredictable.
2. Less Stability: Smaller companies do not have as much money or resources as big companies, so they can struggle during tough times.
3. Harder to Buy and Sell: Since fewer people trade small-cap stocks, it can be difficult to sell them quickly without losing money.
4. Less Information Available: Big companies get a lot of attention from experts, but small-cap stocks do not. This makes it harder to know if they are a good investment.
5. More Risk of Failure: Since small businesses are still growing, they have a higher chance of failing compared to well-established companies.

Investing in small caps can give high returns, but it is also risky like a roller coaster ride with big ups and downs. It is best for people who are okay with taking risks and can wait for long-term growth.

Must Read: Best SIP Plans for 3 Years: Equity, Debt & Hybrid Category 

Who Should Invest in the Best Small Cap Mutual Funds?

Here you will find if investing in small cap funds will suit you or not or whether or not is it worth investing in 2025:

1. You can handle risk: Small-cap stocks are very unpredictable. If you are comfortable with market ups and downs, these funds might be for you.
2. You plan to invest for the long term: Small companies take time to grow. You should be ready to stay invested for at least 7-10 years to see good results.
3. You want to invest in future big companies: Some small companies can grow into major businesses, giving very high returns over time.
4. You already have safe investments: Since small cap funds are risky, it is good to have stable investments like large cap funds before adding small caps to your portfolio.

Likewise, if safer and stable investments with minimal risk were what you are after, then investing in large cap mutual funds would be a better choice.

Small Cap Mutual Funds Tax in India

Here is how the taxation on small cap mutual funds works after the announcement in the Union Budget 2025-26 under the new tax regime:

1. Short-Term Capital Gain (STCG)

• If you sell your investments for a small cap funds before 1 year, your profit will be called short-term capital gain.
• Tax Rate:15% on the entire profit you make on your investments.

2. Long-Term Term Capital Gain (LTCG)

• If you sell your fund
• after 1 year, your profit is called long-term capital gain.
• No Tax on First Rs.1 Lakh:If your total long-term profit in a year is up to Rs.1 lakh, investors have to pay no tax.
• Tax Rate:If your profit is more than Rs.1 lakh, you have to pay 10% tax on the extra amount.

3. Tax on Dividends

• If your small-cap mutual fund gives you a dividend, a 10% taxis deducted before you get the money.

So, if you want to save on taxes, it’s better to keep your investment for more than a year instead of selling it quickly.

Pro Tip: Calculate how much tax you have to pay using the Tax Calculator for free.

To Conclude Best Small Cap Mutual Funds for 2025

In short, these 5 best small cap mutual funds for 2025 are a great fit for anyone looking for robust growth while making high returns for their portfolio. However, you can start by investing via SIP (Systematic Investment Plan) which will help you combat the risk that comes along with small cap funds. This is an all-time best strategy to handle the volatility of the market that these small cap funds bring.

Read More Such Related Posts:

1. How to Start SIP Investment in India: Guide for Beginners
2. Small Cap vs Mid Cap vs Large Cap Funds: Which is Best?
3. Best SIP Plans for 1 Year: Grow Your Money Fast