Top Small-cap Mutual Funds For NRIs In 2024

Small cap funds, which primarily invest in stocks of small companies with growth potential and potential to generate high returns.

Small cap funds have performed exceptionally well post-covid. In the past few years, post-covid market conditions have remained consistently favorable to investors, instilling a sense of stability & confidence.

The increased demand for small-cap funds further underscores this positive trend.

However, it's important to note that small-cap funds, while potentially lucrative, also carry high-risk due to high-volatility in small companies. The risk is significantly higher compared to large cap mutual funds and mid cap mutual funds.

Therefore, it is necessary to understand small-cap mutual funds to determine whether they are right for you.

What Are Small-cap Mutual Funds?

Small-cap funds allocate a minimum of 65% in stocks that are ranked below top-250 listed companies on Indian stock exchange.

The Securities Exchange Board of India (SEBI) categorizes the stocks ranked below 250 by market-cap as small-cap stocks.

The ranking of the listed companies is as per the market capitalization.

Here, the companies’ net worth (market capitalization) is less than 5000 crores and are often known to be highly volatile.

Small-cap stocks consist of emerging young companies experiencing rapid growth. These companies offer significant growth potential.

Thus, small-cap funds have a greater potential to generate returns but are prone to high risk due to low liquidity.

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Best Small-cap Mutual Funds For NRIs And OCIs In 2024

If you are a high risk taker, you can consider investing in small cap funds.

Here’s the list of the top small-cap mutual funds for NRIs and OCIs to invest in 2024

Debt Mutual Fund Information

Fund Name	1 Year	3 Years	5 Years	Inception
HSBC Small Cap Fund	42.60%	26.70%	31.30%	22.10%
Tata Small Cap Fund	38.70%	24.30%	32.90%	26.8%
Nippon India Small Cap Fund	48.10%	30.30%	37.50%	22.70%
HDFC Small Cap Fund	33.40%	23.60%	29.10%	17.10%
Quant Small Cap Fund	52.70%	28%	47.10%	13.50%

How Do Small-cap Mutual Funds Work?

Small-cap mutual funds in India invest in stocks of smaller companies with lower market capitalizations.

These funds basically look out for high growth potential since small-cap firms normally have more room for growth.

Under the SEBI regulation, small-cap mutual funds are allowed an investment of at least 65% in small cap companies.

Although these funds have the potential of high returns, greater risk is involved because they are volatile and financially unstable being smaller companies.

Fund Managers perform thorough research to pick up stocks that have bright growth prospects—undervalued firms with viable business models.

There can be huge fluctuations; hence, you should be ready to absorb these shocks and have a long-term investment horizon.

If you plan to diversify your mutual fund portfolio, you can access iNRI’s AI-powered ‘Smart-Investing-Tool' and allocate your investments better.

At iNRI, you will find a curated list of small-cap funds available to you based on the country of your residence.

For NRIs looking to invest in fast-growing sectors, small-cap mutual funds are an excellent option. Learn more about Top Funds in India's Manufacturing Sector 2024 here.

Who Should Invest In Small-cap Funds?

Small-cap funds can be your go-to choice if

You are a seasoned aggressive investor,
You possess high-risk tolerance levels,
You are not in your retirement age

However, the fund might not be an ideal choice, if

You are naive to the Indian market conditions,
You are in your retirement age,
You possess low-risk tolerance levels
You are looking to hold investments for the short-term

Note: Small-cap funds require proper fund analysis and you might need the help of a professional in choosing the right fund.

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Tax Implications For NRIs Investing In Small-cap Mutual Funds

Small-cap funds are equity-oriented funds that attract capital gains taxes based on the investment holding period.

A Long Term Capital Gains Tax (LTCG) of 10% is levied on your investments held in a small-cap fund

If your holding period is more than 12 months
If your capital gains earnings exceeds INR 1,00,000

Note: As per the Budget 2024, from the financial year 2024-25, the LTCG tax deducted at source will be 12.5% provided the capital gains exceed INR 1,25,000.

A Short Term Capital Gains Tax (STCG) of 15% is levied on your investments held in a small-cap fund if the period of holding is 12 months or less.

Note: As per the Budget 2024, from the F.Y 2024-25, the STCG tax deducted at source will be 20%

A Securities Transaction Tax (STT) of 20% (deducted at source) is applicable on receipt of any dividend.

Note: Double Taxation Avoidance Agreement (DTAA) between India & 100+ countries helps NRIs from paying taxes twice on the same income.

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Conclusion

Small-cap funds invest in stocks that are listed on Indian stock exchange but ranked below top-250 in terms of market-cap.

These funds invest in stocks with smaller market-cap implying funds to be highly volatile & investors to have prior investment experience.

Further, small-cap funds can be your ideal choice only if your investment horizon ranges between 5 to 10 years.

This way you get to reap the maximum benefit by holding investments for longer tenure.

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Small-cap Mutual Funds For NRIs: Frequently Asked Questions (FAQs)

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What are small-cap mutual funds?

Small-cap mutual funds are regulated by the SEBI wherein it is mandatory that at least 65% of its funds remain invested in small-cap stocks.

Generally, the small-cap stocks are ranked below the top 250 stocks listed in Indian stock exchange as their market cap is considerably lower.

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Are small-cap mutual funds high risk?

Investing in small-cap funds for a short duration might indicate high risk but when you hold the funds for a longer tenure the volatility gets averaged out.

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What are the benefits of small-cap funds?

The following benefits can be derived when you invest in small-cap funds,

Superior returns
Companies (invested by small-cap funds) can do better in the long run
Market cap of small cap stock being lower than its book value has upward moving potential

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