Micro Cap Mutual Funds

September 4, 2023

Micro Cap Mutual Funds

Micro Cap Mutual Funds are specialized investment funds that primarily invest in micro-cap companies, typically those with a market capitalization of less than INR 3500 Crore. The focus is on companies with significant growth potential despite their small size.


What Is Micro Cap Mutual Fund?

In a Micro Cap Mutual Fund, the fund’s capital is invested in micro-cap companies. These firms fall at the lower end of market capitalization, usually less than INR 3500 Crore. Due to the focus on smaller companies, these funds present opportunities for high growth. However, they also carry a higher level of risk compared to other funds due to their exposure to small-scale companies.

Let us look at an illustration to help clarify. A Micro Cap Mutual Fund manager may decide to invest in a small tech startup working on an innovative product. If the startup becomes successful, the value of the mutual fund’s shares in the company will significantly increase, leading to substantial profits for investors. Conversely, if the startup fails, the investment could result in losses. 

Benefits Microcap Mutual Funds

The primary benefit of investing in Micro Cap Mutual Funds is the potential for significant returns. These funds invest in companies that are in their early stages but have the potential to grow exponentially, translating into increased profits for the fund’s investors.

Here are some benefits of investing in Micro Cap Mutual Funds:

  • High Return Potential: As these funds invest in small companies with immense growth possibilities, the potential for high returns is substantial.
  • Diversification: These funds allow investors to diversify their portfolios by including companies from various sectors.
  • Affordability: Being small companies, the cost of shares in micro-cap firms is usually lower, making it affordable for average investors.
  • Exposure to Innovations: Micro-cap companies often bring innovative products and technologies, providing an exciting investment opportunity.

It’s important to remember that while Micro Cap Mutual Funds can offer substantial profits, they also involve a higher risk level. Thus, investing in these funds should align with an investor’s risk tolerance and financial goals.

Micro Cap Vs Small Cap Mutual Fund

The primary difference between Micro Cap and Small Cap Mutual Funds lies in the size of the companies they invest in. Micro Cap Mutual Funds invest in the smallest companies (micro-cap) with a market cap of less than INR 3500 Crore, while Small Cap Mutual Funds invest in slightly larger companies (small-cap) with a market cap below INR 5000 crore.

ParameterMicro Cap Mutual FundSmall Cap Mutual Fund
Market CapLess than INR 3500 CroreMarket cap ranking less than INR 5000 Crore
RiskHigher due to the smaller size of companiesComparatively lower than Micro Cap funds
Return PotentialHigh, if the micro-cap company grows significantlyHigh, but comparatively less than Micro Cap funds
Company sizeSmallest companies with high growth potentialLarger than micro-cap but smaller than mid and large-cap companies
Investment HorizonLong-term investment horizonLong-term investment horizon
VolatilityHigher volatility due to the smaller size of companiesModerate volatility due to the size and nature of companies
LiquidityLower liquidity compared to larger-cap fundsModerate liquidity, but lower than large-cap funds
Investment StrategyFocus on identifying undervalued micro-cap companiesFocus on small-cap companies with growth potential
DiversificationLess diversified portfolio due to limited optionsRelatively more diversified portfolio
Growth PotentialHigher growth potential due to the smaller sizeSignificant growth potential, but lesser than micro-cap funds

Best Micro Cap Mutual Funds India

Choosing the best Micro Cap Mutual Funds depends on various factors, including the fund’s historical performance, the fund manager’s expertise, and the investor’s risk tolerance. Here’s a list of some popular Micro Cap Mutual Funds in India:

  • SBI Small Cap Fund: This fund has consistently provided high returns and is managed by an experienced team at SBI Mutual Fund. The fund primarily invests in small and micro-cap companies across sectors. Despite the market’s volatility, this fund has shown resilience with robust returns, marking approximately a 50% return in the past year.
  • DSP Small Cap Fund: Managed by DSP Mutual Fund, this fund also invests in small and micro-cap companies, focusing on long-term capital appreciation. This fund’s focus on value-oriented stocks resulted in a commendable performance with around a 45% return over the past year.
  • HDFC Small Cap Fund: This fund invests predominantly in small and micro-cap companies, providing a balance between growth and stability. This fund delivered returns of about 40% in the past year.
  • L&T Emerging Businesses Fund: This fund targets emerging businesses, many of which fall into the micro-cap. Targeting emerging businesses, the fund saw significant growth, providing a return of roughly 42% in the past years.

Remember, investing in any mutual fund should align with your financial goals and risk tolerance. Consult with a financial advisor or utilize platforms like Alice Blue to make informed investment decisions. 

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Micro Cap Mutual Funds – Quick Summary

  • Micro Cap Mutual Funds: These funds focus on investing in micro-cap companies with a market capitalization of less than INR 3500 Crore, offering high growth potential but higher risk.
  • Benefits of Micro Cap Mutual Funds: Investors can benefit from the potential for significant returns, diversification across sectors, affordability, and exposure to innovative companies.
  • Micro Cap vs. Small Cap Mutual Funds: Micro Cap funds invest in the smallest companies with high growth potential. Small Cap funds invest in slightly larger companies ranked below the top 100 in market capitalization.
  • Best Micro Cap Mutual Funds in India: SBI Small Cap Fund, DSP Small Cap Fund, HDFC Small Cap Fund, and L&T Emerging Businesses Fund are popular options based on historical performance and expertise of fund managers.
  • Remember to align your investment choices with your financial goals and risk tolerance. Consult a financial advisor or use platforms like Alice Blue for informed investment decisions.
  • Start investing in micro-cap mutual funds with Aliceblue. They are offering a user-friendly interface at low brokerage fees.

What Is Micro Cap Mutual Fund – FAQs  

1. What Are Micro-cap Funds?

Micro-cap funds invest in small companies growing quickly and have a market capitalization of less than INR 3500 Crore. They could bring in a lot of money, but the risk is higher because they are volatile and hard to sell.

2. What Is An Example Of Micro-cap Stocks?

Remus Pharma, Phantom Digital, and Concord Control are all examples of micro-cap stocks. 

3. What Size Is Micro-cap Stocks?

The market capitalization of micro-cap stocks in rupees is usually between a few crore rupees and a few hundred crore rupees. However, the exact size can vary, with some definitions stating that micro-cap stocks are worth up to ₹2,000 crore or ₹3,000 crore.

4. Is There Any Micro-cap Mutual Fund?

Here are a few examples of mutual funds in India that focus on investing in micro-cap stocks:

  • SBI Small Cap Fund
  • HDFC Small Cap Fund
  • Kotak Small Cap Fund

5. Is Micro-cap A Good Investment?

Investing in micro-cap stocks can be a good way to make money because these companies have a lot of room to grow. But it is important to remember that micro-cap investments have a higher risk due to their volatility and lack of liquidity. 

6. Are Micro-cap Stocks Risky?

Yes, micro-cap stocks are seen as investments with more risk. They tend to be more volatile and have less cash than larger companies. Because they are smaller, they can be more affected by changes in the market and may have a higher level of investment risk.

7. What Is Micro-cap Vs Mega Cap?

Mega-cap companies are the biggest and have market capitalizations of INR 200,000 crore or more. On the other hand, micro-cap companies are usually worth less INR 5000 crore.

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