Best Small Cap Mutual Funds for Long Term Investment in 2025

Ever wondered why so many well-known investors swear by the small cap mutual funds for long term growth? Well, the main reasons are that small cap funds can grow really fast, adapt quickly to uncertain market conditions and provide long-term capital appreciation. Just like these big investors, you can also rise above with the Best small cap mutual funds for long term investment in 2025. But the question is which funds are the top small cap mutual funds and which one of them is best for your goals.

Well, the list can be big. But let us make this easy for you by revealing the top 3 names in the list, which are Bandhan Small Cap Fund, Edelweiss Small Cap Fund and HSBC Small Cap Fund. These funds have shown consistent performance in the long term.

Now, you must be curious about how these funds work and want to know more about the best small cap mutual funds in India for long-term growth in 2025, right? Stick around then because this blog is going to tell you everything you want to know, from performance, picking the right fund and SIP vs lump sum option to risks, benefits and more. So, let us dive in!

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Small Cap Mutual Funds Explained. Why Invest in Small Cap Mutual Funds for the Long Term?

Mutual funds that primarily invest in the stocks of companies with relatively small market capitalisation are called Small Cap Mutual Funds. These companies are the ones that are ranked below the top 250 in terms of market value on the stock exchanges, according to the SEBI's definition.

The Small Cap Funds mainly focus on the emerging companies that have high growth potential. But, because the funds invest in companies that are not yet stable, there is higher volatility and risks involved, as compared to the large and mid-cap funds.

Here are the main reasons why you should invest in these funds for long term growth:

Small companies can grow quickly as they are in the growth stage and have more opportunities.
Small companies can quickly adapt to market changes, innovate fast and benefit from niche markets, giving strong performance.
Small cap stocks are often undervalued by big investors, leading to low prices. But a smart investor can recognise their true worth.
These funds can lower overall risk and fluctuations of your portfolio, as these companies often have a low correlation with large-cap stocks.
If you invest in these mutual funds for a longer period (7-10 years), they can grow and adapt to the market with time and give higher returns.

Now, let us look at the list of the top small cap mutual funds Indiain 2025.

Listing Best Small Cap Mutual Funds for Long Term in 2025

The following are the best small cap mutual funds for long term growth in India:

Fund Name	Launch Date	NAV (Rs)	Min SIP Amount (Rs)	Fund Manager	Benchmark
Bandhan Small Cap Fund	08-02-2020	47.72	500	Manish Gunwani	BSE 250 SmallCap TRI
Edelweiss Small Cap Fund	01-02-2019	44.23	3000	Trideep Bhattacharya	NIFTY Smallcap 250 TRI
HSBC Small Cap Fund	12-05-2014	80.55	3000	Venugopal Manghat	NIFTY Smallcap 250 TRI
Invesco India Small Cap Fund	05-10-2018	42.42	3000	Taher Badshah	BSE 250 SmallCap TRI
Tata Small Cap Fund	02-11-2018	38.21	3000	Chandraprakash Padiyar	NIFTY Smallcap 250 TRI

The important point here is to note that small cap mutual fund investments contain high risk because of the volatility included. Therefore, these mutual funds are highly suitable for investors who are willing to take high risks with their money and can stay invested for a longer period of time.

Must Read: Top 10 Mutual Funds for SIP in 2025: Best Picks to Grow Wealth

Now, let us review the best small cap fund performance based on their returns over long term period.

Long-Term Performance Review of Best Small Cap Mutual Funds

Here is the performance analysis of the top performing small cap mutual funds with consistent returns:

Fund Name	Expense Ratio	3-Year Returns	5-Year Returns	AUM (Crore)
Bandhan Small Cap Fund	1.64%	31.14%	29.70%	17,380
Edelweiss Small Cap Fund	1.81%	20.40%	27.36%	5,297
HSBC Small Cap Fund	1.67%	19.56%	28.32%	16,548
Invesco India Small Cap Fund	1.72%	25.30%	29.73%	8,720
Tata Small Cap Fund	1.67%	18.12%	27.03%	11,792

In the next part, you will learn how to pick the best small cap fund for your investments. So, keep reading.

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How to Choose the Best Small Cap Mutual Fund for the Long Term?

Before choosing the best small-cap mutual funds to invest in 2025 for a long-term perspective, investors need to consider both quantitative and qualitative factors and evaluate them carefully. Given below are some factors to check out:

Fund Manager
Look for a fund whose manager has a proven, long track record and expertise in navigating market cycles and pick good companies.

Performance
Check how consistent the small cap fund returns are and how consistently the fund outperformed its benchmark and peers.

Risk Metrics
Calculate the risk level of the mutual fund using small cap fund risk factors like Standard deviation and Sharpe ratio.

Expense Ratio
Check the small cap fund expense ratio, a lower ratio is considered to be good, as it means more of your money is invested.

AUM (Assets Under Management)
A large AUM reflects the trust of investors in the fund, but a very large AUM for small-cap funds can create challenges.

Portfolio Composition
Ensure the small cap fund portfolio allocation is diversified across various sectors and industries to mitigate risk.

Investment Style
Understand what the investment strategy of the fund is and ensure it matches your personal goals and risk level.

Investment Horizon
The small cap mutual funds are the best suited for investors with a long-term time horizon of at least 7-10 years and a high-risk level.

Also Read: Top 10 Flexi Cap Mutual Funds: High-Return Picks in India 2025

Let us know which is a better method for your small cap investments, SIP or Lump Sum.

SIP vs Lump Sum: Which is Better for Small Cap Mutual Funds?

Here is the comparison of the small cap fund SIP vs lump sum investment 2025:

Aspect	SIP (Systematic Investment Plan)	Lump Sum Investment
Investment Style	Regular, fixed contributions at intervals (monthly, quarterly)	One-time, bulk investment
Market Timing Risk	Lower risk due to phased investment; benefits from rupee cost averaging	Higher risk; full amount exposed to market volatility
Suitability	Ideal for investors with regular income and a disciplined savings habit	Suitable for investors with ready surplus funds and a higher risk tolerance
Volatility Management	Helps smooth out market ups and downs over time	Immediate full exposure; higher short-term volatility
Compounding Benefit	Gradual accumulation; earnings reinvested over time	Full capital benefits from day one
Affordability	Requires small amounts, making it accessible to most	Requires substantial initial capital
Potential Returns	May be slightly lower but more consistent over time	Potentially higher returns if timed well
Best For	Long-term wealth creation with lower stress on timing	Experienced investors wanting to invest lump sums

As described in this post, small cap mutual funds are quite volatile, so it is important to think carefully about them. Investing through small cap mutual fund SIP plans can be beneficial as SIP investments are easy to start with, even for a beginner and it also helps to spread the risk involved. Meanwhile, a lump sum investment can definitely bring higher returns, but only if done at the right time and requires good timing skills. Both options work best with a long-term investment approach.

Pro Tip: Use a SIP Calculator and estimate the future returns of your SIP investment easily.

Now, let us uncover the benefits as well as the risks of doing a small cap investment in India.

Benefits and Risks of Small Cap Mutual Funds

Every investment made in mutual funds comes with some risks involved, while they offer great benefits. The case is no different with small cap mutual funds. Here are the benefits and risks involved:

Benefits of Small Cap Mutual Fund Investments

Small cap stocks have the potential to generate high returns.
If included in the portfolio, they can reduce overall risk.
These funds capture growth opportunities in the market.
Smaller firms can quickly adapt to market changes and consumer demands.
It can be attractive for larger firms looking to grow by entering new markets (Merger & Acquisition (M&A) potential).

Risks Associated with Small Cap Mutual Funds

Small cap funds tend to fall faster than large cap funds in a downturn.
They have high volatility and their price can fluctuate more.
Their lower trading volumes make them less liquid.
Small companies may have fewer resources and less capital.
Small-cap funds may take a longer time to recover during a market fall.
These firms often have less available information, demanding more detailed research to find quality businesses.

Important: Top 5 Liquid Funds in India 2025: For Safe & Instant Returns

Is It Safe to Invest in Small Cap Mutual Funds?

The safety of small cap funds depends on many factors. The small cap mutual funds are not safe for everyone because they include high volatility, liquidity challenges and higher failure risk. These mutual funds have huge price swings, which means your investment value can drop sharply during market corrections. With fewer resources, these stocks are more vulnerable to economic downturns.

But, considering the points given below, you can invest safely and can pick the safest small cap mutual funds for long term wealth creation:

Staying invested for longer (7-10 years or more).
Limiting your exposure, only allocate 5-15% of your total investment to small-cap funds.
Invest via SIP, use the best SIPsmall cap funds for consistent wealth creation and reduce timing risks.
Go with funds that can diversify your investment amount across various sectors.
Get expert help for a personalised small cap investment plan.

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Conclusion

To conclude, the best small cap funds for long term investment include names like Bandhan Small Cap Fund, Edelweiss Small Cap Fund, HSBC Small Cap Fund, Invesco India Small Cap Fund and Tata Small Cap Fund.

For your investment in 2025, go with the small cap mutual funds with low expense ratios and high returns. Always match your unique investment goals, horizon and risk level with the fund to generate optimised returns and consider SIP investments to reduce overall risk involved.

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FAQs

What is the Best Investment Horizon for Small Cap Investments?
It is recommended to invest for at least 5 years, allowing you to handle market volatility and take advantage of long-term growth potential.

Are Small Cap Mutual Funds Riskier than Large or Mid Cap?
Yes, small-cap funds carry more risks because they invest in smaller companies that are less stable in the market.

Are Small Cap Mutual Funds Suitable for New Investors?
New investors can invest, but they should understand the risks and aim for a long-term investment of at least 5 years.

What is the Taxation of Small Cap Mutual Fund Investments?
The tax rates of 12.5% on long-term gains (if held for more than 12 months) of small cap funds are better than short-term gains with 20% tax.

How Does SEBI Define a Small Cap Company?
According to SEBI, the companies that rank below 250 on the stock exchange based on market cap are small cap companies.