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Best mid & small-cap funds: Leverage the power of market caps for better returns

This article attempts to talk about the best mid and small cap funds. It also talks about the potential returns and the risks associated.

Portfolio diversification in mutual fund investment is necessary to ensure good returns. For this, some fund schemes spread the investment across different assets, while others cover various company categorizations to achieve the desired results. Here mid & small-cap funds are one such attempt to diversify the instruments and capitalize from two different market categorizations. 

As the name implies, mid & small-cap funds invest in stocks and equity-related securities of small and mid-cap companies expected to grow and become future leaders. The ratio of midcap and small-cap in mid & small-cap funds varies with funds. There can be different schemes within the mid & small-cap funds wherein some focus more on mid-cap stocks, whereas some on small-cap stocks. These funds come under the high-risk investment category as they can both rise & fall more sharply than other funds. However, if these companies are managed well, they can offer more than expected returns. 

Best mid & small-cap funds in 2022 in India

The following table shows some well-known mid & small-cap funds in India and their respective returns with time.

Scheme Name
Direct plan - Growth option
AUM(Rs. crores)1 year(Absolute return)3 years(CAGR)5 years(CAGR)
BOI Mid & Small Cap Equity & Debt Fund2,7500.38%19.23%12.21%
Canara Robeco Small Cap Fund2,344.1330.65%32.99%-
Kotak Small Cap Fund7,235.8217.14%30.74%17.79%
Edelweiss Mid Cap Fund1,958.7-20.18%13.24%
Baroda BNP Paribas Mid Cap Fund1,189.62-19.15%10.83%

Who can invest in mid & small-cap funds? 

Note that mid-cap & small-cap funds decline more than large-cap funds in highly volatile and uncertain market conditions. These funds go through high fluctuation levels in the market, which increase the risk for investors. However, they have a tremendous potential to beat large-sized funds by a noticeable margin over the long run. Thus, investors are advised to invest in mid & small-cap funds only if they have a high-risk appetite to withstand short-term losses and high volatility.

Investors with a long investment horizon of at least 5-10 years can choose to invest in these funds. That is because a long investment period lowers the risk in mid-cap & small-cap funds. However, along with a long investment horizon, investors must be tolerant of high volatility and risk. Investors must consider their investment horizon, risk appetite, and financial goals before investing in these funds.

Return potential of mid & small-cap funds

Mid & small-cap funds have great potential to offer higher returns. Over the last year, mid & small-caps funds have outperformed Sensex and Nifty due to an increase in market participants. Having that said, the performance of mid & small-cap funds depends a lot on market conditions. When stock markets perform well, these funds generate better returns, but when the market doesn't, they fall like anything. 



Since the investments are made predominantly in small and mid-size companies, they are highly volatile. These companies may or may not perform well over the years or, in some cases, vanish from the market. 

Taxation of gains from mid & small-cap funds

Mid & small-cap fund investment gains from equity funds are subject to taxation. The tax rate depends on the duration investors wish to stay invested and gain from the funds. Based on their investment duration, an investor may generate Short-term capital gains (STCG) and Long-term capital gains (LTCG) and be taxed accordingly.

The capital gains from units held for less than one year are considered STCG and taxed at 15%. If the holding period is more than a year, the gains generated from units are considered LTCG. The long-term capital gains of over Rs 1 lakh are taxed at 10% without indexation, whereas below 1 lakh are tax-free. Suppose your equity gains are 1.4 lakh in a financial year, so the 10% tax is applied only on Rs 40,000, whereas the remaining 1 lakh will be tax-free. 

Risk in mid & small-cap funds 

While the mid & small-cap segment has several good companies with powerful business fundamentals, investors must be mindful of their exposure to mid & small-cap funds as their value may fall sharply during the market correction. The mid-and small-cap companies get driven by a highly liquid market and big investors. So when they exit, these companies go down faster as there is a lack of liquidity in their stocks. In short, when stock markets perform well, the mid-cap and small-cap funds generate better returns, but when the market doesn't, they fall like anything.

Advantages of investing in mid & small-cap funds

Since the mid & small-cap funds invest in two different market capitalizations, it gives investors equal exposure to small & mid-cap funds. It also prevents investors from the hassles and additional cost of investing in two funds with different market capitalizations. However, investors must diversify their portfolios across various asset classes or in the same assets but different mutual fund categories to keep their portfolios well balanced against the risks. Furthermore, since these funds have lower share sizes, they have the potential to grow more than large caps in the future. However, remember they involve higher risk too.


Although mid & small-cap funds underperform in the short run, they can significantly boost your portfolio returns if you choose to invest in them for the long run. Investors with moderate to high-risk appetites and medium to long financial goals can invest their major portion of money in equity-based funds of mid & small-cap companies. Investing through a SIP mode will be an ideal choice. In SIP, investors can invest small amounts in the fund over a fixed period wherein the payment frequency can be weekly, monthly, and quarterly. With SIP, you can avoid the pitfalls of equity investments, reduce the risk and grow your wealth through compounding. 


Got any queries related to mid & small-cap funds? We have got you covered with this FAQ section.

  1. What is market capitalization?
    • Ans: Market capitalization, referred to as a market cap, is the company's total market value based on the value of its owned shares.  
  2. How much should I allocate to mid & small-cap funds?
    • Ans: If you are planning to invest in mid & small-cap funds, make sure to get your risk profiling done, and based on the range of risk you fall in, decide on your investment and number of units. 
  3. What is the minimum investment amount of mid & small-cap funds?
    • Ans: These funds don't require a large sum of money for investment. You can invest in mid & small-cap funds with a minimum of Rs 500 through SIP.
  4. Do mid & small-cap funds come with a lock-in period?
    • Ans: There is no lock-in period for mid & small-cap funds. You can invest in mutual funds and redeem your units anytime, as per your wish.
  5. What to consider before investing in mid & small-cap funds?
    • Ans: Before investing in mid & small-cap funds, investors must, 
      • Check the risk involved in these funds as it's directly proportional to how the asset allocation is done in the portfolio. Look at the fund's composition, such as the stocks it invests in.
      • Analyze your own financial goals as per your investment horizon and risk appetite. Check if they are in line with the fund's objective. To get a better idea of this, you can seek advice from professional financial advisors from Glide Invest.

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