Best Micro Cap Mutual Funds for Long-Term Portfolio Growth

Ever since stock markets were created, investors have consistently crafted strategies aimed at surpassing the market’s average return. Some opt for investments in large corporations, while others focus on smaller companies. Some may disregard company size altogether and invest in companies of any scale as long as they exhibit the potential to generate returns that outpace the market. Lastly, others primarily might want to invest in micro cap companies. Sounds interesting, right? Let’s discuss the best micro cap mutual funds and how you can invest in them.

List of Best Micro Cap Mutual Funds India 2024

Here is a list of the best micro cap mutual funds India that you might want to consider.

Name	Sub-Category	AUM (Rs. in cr.)	CAGR 3Y (%)	CAGR 5Y (%)
Bank of India Small Cap Fund	Small Cap Fund	1,537.17	22.68	37.57
ICICI Pru Commodities Fund	Thematic Fund	2,437.67	18.72	32.66
DSP Healthcare Fund	Sectoral Fund - Pharma & Health Care	3,138.46	22.62	32.25
Bank of India Mfg & Infra Fund	Sectoral Fund - Infrastructure	519.36	24.84	30.83
Bandhan Infrastructure Fund	Sectoral Fund - Infrastructure	1,776.78	27.62	30.57
Invesco India Infrastructure Fund	Sectoral Fund - Infrastructure	1,590.98	26.33	30.37
Mirae Asset Healthcare Fund	Sectoral Fund - Pharma & Health Care	2,793.61	18.3	30.1
SBI Healthcare Opp Fund	Sectoral Fund - Pharma & Health Care	3,416.13	23.93	29.88
LIC MF Small Cap Fund	Small Cap Fund	385.61	22.85	29.72
Canara Rob Infrastructure Fund	Sectoral Fund - Infrastructure	848.06	27.76	29.55

Disclaimer: Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.

Note: The data on the top micro cap companies in India in the list is from 19th November 2024. This data is derived from the Tickertape Mutual Funds Screener.

• Plan: Growth
• AUM: Less than Rs. 3,500 cr.
• CAGR 5Y – Sorted from highest to lowest

🚀 Pro Tip: You can use Tickertape’s Mutual Fund Screener to research and evaluate funds with over 50+ pre-loaded filters and parameters.

What are Micro Cap Mutual Funds?

Micro Cap Mutual Funds are investment vehicles that focus on the smallest publicly traded companies, known as micro-cap stocks. These funds aim to provide investors with exposure to companies typically characterised by a market capitalisation of less than Rs. 3,500 cr. By investing in a diversified portfolio of these smaller firms, investors seek to capitalise on their potential for significant growth.

Micro cap funds allow investors to buy a collection of stocks from these smaller companies. The limited liquidity and a small shareholder base can make these extremely small-cap companies more susceptible to market shocks. However, these funds come with elevated risks due to limited liquidity and a smaller shareholder base, making micro-cap companies more susceptible to market fluctuations. For those willing to embrace these risks, the potential rewards can be substantial.

What is the Size of Micro-Cap Funds?

The classification of micro-cap funds can vary among different fund houses. Generally, they invest based on market capitalisation or indices such as the S&P BSE SmallCap Index. In this framework:

• Large-Cap: Top 100 companies
• Mid-Cap: Next 100 companies (101-200)
• Small-Cap: Next 100 companies (201-300)
• Micro-Cap: Companies ranked 301 and below

Micro-cap funds typically target companies that rank lower than 250 in terms of market capitalisation, focusing on those with significant growth potential despite their smaller size.

Top Micro Cap Funds – Overview 

Let’s discuss the top micro cap funds in India. 

Bank of India Small Cap Fund

Bank of India Small Cap Fund, launched in 2018, focuses on small-cap companies with high growth potential across diverse sectors. The fund is designed for investors seeking long-term capital appreciation by tapping into emerging businesses with strong prospects. Its strategy involves identifying undervalued companies with significant upside potential, making it an attractive choice for aggressive investors.

ICICI Prudential Commodities Fund

ICICI Prudential Commodities Fund, introduced in 2019, invests in companies operating in the commodities sector, such as energy, metals, and materials. The fund aims to capitalise on the cyclical nature of commodity markets, offering opportunities for robust returns. It is well-suited for investors seeking thematic exposure to commodity-driven industries, benefiting from global demand trends and economic cycles.

DSP Healthcare Fund

DSP Healthcare Fund, launched in 2018, focuses on the pharmaceutical and healthcare sectors. The fund invests in companies that drive innovations in medicine, biotechnology, and healthcare services. With a strong emphasis on emerging healthcare trends, it provides investors with an opportunity to benefit from the rising demand for quality healthcare solutions globally.

Bank of India Manufacturing & Infrastructure Fund

Bank of India Manufacturing & Infrastructure Fund, established in 2021, targets investments in companies involved in infrastructure development and manufacturing. The fund is ideal for those looking to benefit from India’s growth story, as it focuses on sectors critical to the country’s economic progress, including construction, engineering, and industrial manufacturing.

Bandhan Infrastructure Fund

Bandhan Infrastructure Fund invests primarily in infrastructure-related businesses, such as transportation, energy, and construction. Launched in 2016, the fund aims to capture growth opportunities in India’s expanding infrastructure sector, driven by government policies and private investments. It is designed for investors seeking long-term growth aligned with the country’s development trajectory.

Invesco India Infrastructure Fund

Invesco India Infrastructure Fund focuses on businesses that drive infrastructure development in India, including power, transportation, and telecommunications. Introduced in 2008, the fund leverages India’s expanding infrastructure landscape, providing investors with an opportunity to participate in the growth of core industries that are essential for economic development.

Mirae Asset Healthcare Fund

Mirae Asset Healthcare Fund, launched in 2018, invests in the pharmaceutical, biotechnology, and healthcare services sectors. The fund is tailored for investors who wish to capitalise on the increasing demand for healthcare solutions driven by an ageing population and rising healthcare awareness. Its diversified approach ensures exposure to both domestic and global healthcare opportunities.

SBI Healthcare Opportunities Fund

SBI Healthcare Opportunities Fund, introduced in 2013, targets the healthcare and pharmaceutical sectors. The fund focuses on companies involved in drug manufacturing, biotechnology, and medical equipment, offering a comprehensive exposure to the healthcare industry. It is designed for investors looking to align with the growth of healthcare demand and innovation.

LIC MF Small Cap Fund

LIC MF Small Cap Fund invests in small-cap companies with promising growth potential. Launched in 2019, the fund provides exposure to emerging businesses across sectors. It is an excellent choice for investors looking to achieve long-term capital appreciation by taking advantage of growth opportunities in the small-cap segment.

Canara Robeco Infrastructure Fund

Canara Robeco Infrastructure Fund focuses on infrastructure development, targeting sectors such as construction, transportation, and utilities. Launched in 2005, the fund seeks to benefit from India’s massive infrastructure expansion initiatives, providing an opportunity for investors to participate in the long-term growth of critical sectors shaping the country’s economy.

How Do Micro Cap Mutual Funds Work?

Microcap funds work by pooling investor capital to invest in microcap stocks—companies with market capitalisations typically under $300 million. Fund managers actively research and select stocks with strong growth potential, focusing on diversification to manage risk. These funds face liquidity challenges due to the lower trading volume of microcap stocks, so managers plan trades carefully. While microcap funds are more volatile and riskier than larger-cap funds, they target long-term growth, making them ideal for investors with a high-risk tolerance and a long investment horizon. Regulatory guidelines ensure transparency and investor protection throughout.

Micro Cap vs Small Cap Mutual Fund

Micro Cap and Small Cap Mutual Funds are both types of equity mutual funds that focus on companies with relatively smaller market capitalisations, but they differ in the size range of the companies they target. Let’s understand their differences in a tabular form.

Feature	Micro Cap Mutual Fund	Small Cap Mutual Fund
Market Capitalization	Invests in companies with a market cap typically below Rs. 3500 crores.	Market cap ranking less than Rs. 5000 Crore
Risk and Volatility	Generally, liquidity is better compared to micro-cap funds, but liquidity can vary based on specific holdings.	Comparatively lower than micro-cap funds as small-cap companies are more established.
Growth Potential	Can offer significant growth potential, as smaller companies may have more room for expansion.	Presents growth potential, but may be less than micro-cap funds
Diversification	Limited diversification	Comparatively better diversification benefits, but not as much as mid-cap or large-cap funds.
Investor Profile	Suited for investors with a higher risk tolerance and a long-term investment horizon.	Appeals to investors seeking growth opportunities with a moderate to high-risk tolerance.
Investment Strategy	Focus on identifying undervalued micro-cap companies	Focus on small-cap companies with growth potential
Liquidity Concerns	Lower liquidity compared to  mid & larger-cap funds	Presents growth potential but may be less than micro-cap funds

Features of Micro Cap Mutual Funds 

Let’s have a look at the features of the best micro cap mutual funds in India. 

• Market Coverage: Can primarily invest in companies with market capitalisation ranging from Rs. 150 crore to Rs. 3,500 crore (depending on fund definition). 

• Sector Diversification: Spread investments across various sectors like IT, healthcare, banking, etc., to mitigate risks associated with individual industries.

• Minimum Investment: Typically have lower minimum investment requirements compared to other mutual funds, making them accessible to a wider range of investors.

• Higher Volatility: Micro cap stocks can be generally more volatile due to their smaller size.

• Tax Benefits: Enjoy similar tax benefits (long-term capital gains tax) as other equity mutual funds. 

Who Should Invest in Micro Cap Mutual Funds?

Well, Micro Cap Mutual Funds might not be for everyone! They cater to a specific type of investor who thrives on high-risk, high-reward possibilities. While the potential for significant returns exists, investors need to conduct thorough research, understand the higher level of risk, and be patient, as the growth of micro-cap stocks often occurs over an extended period.

Factors to Consider Before Investing in Micro Cap Mutual Funds

Before investing in micro cap funds in India, you must keep the following basic points in mind listed down below: 

• Risk Tolerance: Assess your ability to withstand potential volatility in micro-cap stocks.

• Investment Horizon: Determine if you have a long-term perspective for potential growth.

• Research Capability: Ensure you can conduct thorough research due to limited analyst coverage.

• Portfolio Diversification: Consider how micro-cap funds fit into your overall portfolio diversification.

• Patience and Discipline: Be patient and disciplined, as micro-cap investments may take time to yield results.

Risks Involved While Investing in Micro Cap Funds India

Given the size of micro cap companies, some investors might be drawn to invest in them. Therefore, it’s advisable to have a look at the associated potential risks below: 

• High Volatility: Micro cap companies can be more sensitive to market fluctuations and economic changes than larger, established companies.

• Limited Liquidity: Since Micro-Cap companies are traded less frequently, selling your shares might be difficult and could take time.

Benefits of Investing in Micro Cap Mutual Funds in India

Let’s have a look at the undeniable benefits of the best micro cap mutual funds India. 

• Focus on Micro-Cap Companies: These are typically small, relatively unknown companies with a market capitalisation of less than Rs. 3500 cr. Imagine a young, innovative tech startup with a promising new product – that’s the kind of company a micro cap mutual fund might invest in.

• High Growth Potential: The main attraction of micro cap mutual funds is the potential for significant returns. Since these companies might be still in their early stages, they have room to grow rapidly if their business takes off. It’s like planting a seed and hoping it blossoms into a giant tree.

• Active Management: Micro cap mutual funds are usually actively managed by fund managers who have expertise in researching and picking small, promising companies. They spend their time digging deep to find hidden gems with the potential to explode.

• Diversification: While each micro cap company carries its risks, investing in a micro cap mutual fund helps spread that risk across multiple companies and sectors. It’s like putting your eggs in different baskets to avoid losing everything if one basket falls.

As always, investors must do their own research and/or consult their financial advisor before investing.

How to Choose Best Microcap Funds for Investing?

Here’s how to choose the best microcap funds for your portfolio:

• Prioritise Your Risk Tolerance and Investment Horizon: Identify and prioritise your risk tolerance since micro cap mutual funds can be highly volatile.

• Fund Management Matters: Find a fund with a seasoned manager who consistently navigates the microcap space. 

• Analyse the Investment Strategy: Does the fund’s focus align with your goals? Look for growth-oriented funds with diversified sector exposure to mitigate risk.

• Dig into Performance & Risk Management: Check the fund’s historical returns, volatility levels, and risk management practices. Past performance isn’t a guarantee, but it can offer insights.

• Fees & Expenses: Compare expense ratios and other fees across similar funds. Lower fees may translate to higher potential returns for you.

• Consider Liquidity: Understand that selling microcap shares can be slow.

What are the Returns on the Best Micro Cap Mutual Funds & How are they Calculated?

The returns on the best Micro Cap Mutual Funds can vary widely. These can also be influenced by the performance of the underlying portfolio of micro-cap stocks. Returns are typically calculated as the percentage change in the fund’s net asset value (NAV) over a specific period, often measured on a monthly, quarterly, or annual basis. Investors should check the fund’s historical performance, considering both short-term and long-term returns. It’s crucial to understand that historical returns are not indicative of future performance, and factors like market conditions, fund management, and economic trends play significant roles in shaping returns.

Taxation on Micro Cap Mutual Funds as per Union Budget of 2024-25

The taxation on capital gains from your mutual fund investments is based on their holding periods and asset allocation. A few revisions were made to the tax rates, depending on their types, in the Union Budget 2024-25. In order to select the best micro cap mutual funds, it is important to learn about these revisions as well. They include:

Equity Mutual Funds

• Short-Term Capital Gains (STCG): The gains from equity mutual funds held for less than 12 months are now taxed at 20%. This is an increase from the previous tax rate of 15%.
• Long-Term Capital Gains (LTCG): For equity mutual funds held for over a period of over 12 months, gains are classified as long-term capital gains. The new budget introduces these key changes to the LTCG:

1. Tax-Free Limit: The capital gains up to Rs. 1.25 lakh per year are tax-free. This is an increase from the previous limit of Rs. 1 lakh.
2. Tax Rate: The gains exceeding Rs. 1.25 lakh are now taxed at a flat rate of 12.5%. This is an increase from the previous rate of 10%.
3. Indexation: The benefit of indexation, which allowed investors to adjust the purchase price for inflation, has been removed for all asset classes, including equity mutual funds.

Indexation was a method that allowed investors to adjust the purchase price of assets for inflation. This adjustment reduced taxable profits when selling assets like property or gold. Previously, these long-term capital gains were taxed at 20%. The new rule imposes a flat 12.5% tax on all long-term capital gains but eliminates any indexation benefits.

Capital Gains Tax	Holding Period	Old Rate	New Rate
Short-Term Capital Gains (STCG)	Less than 12 months	15%	20%
Long-Term Capital Gains (LTCG)	More than 12 months	10%	12.50%

Debt Mutual Funds

• Short-Term Capital Gains (STCG): If you sell your debt fund units within a period of 36 months, the gains are classified as short-term capital gains. The STCG will be taxed according to your income tax slab rate.
• Long-Term Capital Gains (LTCG): For debt funds held for a period over 36 months, the gains are classified as long-term capital gains. The new budget outlines a few changes on the LTCG for debt funds, including:

1. Tax Rate: A flat 12.5% tax rate applies to these gains.
2. No Indexation Benefit: The previous benefit of adjusting the purchase price for inflation is removed. Now, the entire gain after three years is taxable at 12.5%.

• Change in Holding Period for Specified Mutual Funds: Previously, debt mutual funds with a holding period of over 36 months were taxed based on the investor’s tax slab, classified as Long-Term Capital Gains (LTCG). Now, for specified mutual funds where over 65% of the investment is in debt, the holding period for taxation has been reduced to over 24 months. These funds will still be taxed according to the investor’s tax slab as either LTCG or STCG. 

Capital Gains Tax	Holding Period	Old Rate	New Rate
Short-Term Capital Gains (STCG)	Less than 36 months	Taxed according to your income tax slab	Taxed according to your income tax slab
Long-Term Capital Gains (LTCG)	More than 36 months	10%	12.50%

Hybrid Mutual Funds

Short-Term Capital Gains (STCG)

The tax on short-term capital gains depends on the fund’s asset allocation when it comes to hybrid mutual funds. Here is a breakdown of STCG tax rates according to their asset allocation in hybrid funds:

• Equity-Oriented Hybrid Funds (more than 65% in equity): The gains from units sold within 12 months are taxed at 20%.
• Debt-Oriented Hybrid Funds (less than 65% in equity): The gains from units sold within three years are taxed according to your income tax slab.

Long-Term Capital Gains (LTCG)

The capital gains tax on hybrid mutual funds that extend the specified period (12 or 36 months) is known as the long-term capital gain tax. The tax treatment under this condition is as follows:

• Equity-Oriented Hybrid Funds: The gains from units held for over a period of 12 months are taxed at 12.5%. The gains up to Rs. 1.25 lakh are tax-free.
• Debt-Oriented Hybrid Funds: The gains from units held for over a period of 36 months are taxed at 12.5% without indexation benefits. This means the entire gain is taxed at this rate, without adjustment for inflation.

Type of Hybrid  Fund	Short-Term Capital Gains (STCG)	Long-Term Capital Gains (LTCG)	Indexation Benefit
Equity-Oriented Hybrid Funds	20% for holdings less than 1 year	12.5% for holdings over 1 year, with gains up to Rs. 1.25 lakh tax-free	Not available
Debt-Oriented Hybrid Funds	Taxed as per income tax slab for holdings less than 3 years	12.5% for holdings over 3 years	Not available

Note: Mutual fund schemes where neither the equity nor debt orientation exceeds 65% will now be classified as long-term investments after 24 months. The previous holding period for these funds was 36 months. These will be taxed at the revised LTCG tax rate of 12.5%.

To Wrap It Up…

In conclusion, Micro Cap Mutual Funds offer investors a unique opportunity to tap into the growth potential of the smallest publicly traded companies. While these funds present the prospect of high returns, they come with increased volatility and risks. Investors considering Micro Cap Mutual Funds should carefully assess their risk tolerance, investment goals, and time horizon.

However, it’s important to do your own research and/or consult a financial advisor before investing.

Most Popular Mutual Funds:

As an investor to have a diversified mutual funds portfolio, you might also like to know more about these different types of funds for investing –

Large Cap Mutual Funds	Mutual Fund Bulk Deals	SBI Mutual Funds for SIP	SBI MF for Long Term SIP	Sectoral Mutual Funds	Short Term Mutual Funds	Tax Saving Mutual Funds	Mid Cap Mutual Funds
Small Cap Mutual Funds	Pharma Mutual Funds	80c Mutual Funds	1 Year Mutual Funds	International Mutual Funds	Tata Mutual Funds	Mutual Fund Portfolio	Best Mutual Funds
High Risk Mutual Funds	Micro Cap Mutual Funds	AMCs	MNC Mutual Funds	Equity Mutual Funds	Overnight Funds	ICICI Pru Mutual Funds	HDFC Mutual Funds
Best Investment Plans	Fixed Income Mutual Funds	Penny Stock Mutual Funds	Retirement Mutual Funds	Floater Rate Funds	Aggressive Hybrid Funds	Multi Asset Allocation Funds	Children’s Funds
Medium Duration Funds	Debt Funds	Corporate Bonds	Ultra Short Term Funds	Value Funds	Contra Funds	Focused Funds	Funds of Funds
Money Market Funds	Arbitrage Funds	Gold Mutual Funds	Books on Mutual Funds	Best Mutual Funds for SIP	SBI Mutual Funds	Low Risk Mutual Funds	Dividend Paying Funds
Long Term Mutual Funds	Banking Mutual Funds	Gilt Funds	Mutual Funds for 10 Years	Monthly Income Mutual Funds	Nifty 50 Index Funds	Lumpsum Investment Funds	Blue Chip Mutual Funds
Low Expense Ratio Funds

Frequently Asked Questions (FAQs) on Micro Cap Mutual Funds