​​Microcap mutual funds in India have emerged as an intriguing investment option, yet they are often overlooked by investors. Microcap mutual funds offer a unique blend of high growth potential and elevated risk​. For investors seeking to invest in high-growth funds and have a high risk tolerance, these stocks are the perfect choice. In this blog, we will explore microcap mutual funds in India and what investors need to know about microcap mutual funds.
What are Microcap Mutual Funds?
Microcap mutual funds are specialized investment vehicles that invest mostly in companies that are smaller than INR 3,500 crore in market capitalization. These funds concentrate on small-scale businesses with substantial growth potential. According to SEBI classification, micro-cap companies in India are ranked 251st or higher in terms of total market capitalization.
Benefits of Investing in Microcap Mutual Funds in India
There are some compelling benefits to investing in microcap mutual funds in India, especially for risk-tolerant, long-term investors. Some of those benefits are:
High Growth Potential
Microcap companies in India tend to be in a nascent or emerging sector, and are therefore able to provide higher growth than established companies. ​This potential for exponential growth can translate into substantial returns for investors. ​Historically, micro-cap funds have outpaced their larger rivals – as is the case with the Motilal Oswal Nifty Microcap 250 Index Fund from Motilal Oswal Mutual Funds, which has provided 28.26% in returns since inception (as on August 31, 2025).
Diversification
​Microcap mutual funds give investors exposure to a broad range of stocks, spreading their investment across several different companies and reducing the risk associated with individual stock investments. This offers a layer of diversification that helps mitigate some of the inherent risks.
Professional Management
By investing in microcap funds, investors can leverage the expertise of professional fund managers. ​These managers have years of experience and knowledge to identify high-potential microcap stocks; they do their own research and due diligence that individual investors might find challenging.
Key Considerations Before Investing in Microcap Stocks
​Before investing in microcap mutual funds, investors should evaluate their risk tolerance, investment horizon, and financial goals. They should also consider the following factors before selecting any specific micro-cap funds:
Risk Tolerance
Micro-cap funds are most suitable for aggressive investors who have a high risk tolerance and the ability to withstand significant market fluctuations.
Investment Horizon
Microcap funds are best suited for long-term investors, as their full potential may take several years to materialize.
Portfolio Allocation
Investors should start investing in micro-cap funds with a small percentage of their portfolio and can increase exposure as they gain confidence. ​Investors can diversify micro-cap investments across different funds and asset classes.
Due Diligence
While the fund managers handle the stock selection in microcap funds, investors should still analyse the fund’s past performance, expense ratio, and the fund’s history.Â
Fund Manager’s History
Assess the fund manager’s experience, track record, and risk management strategies to ensure prudent stock selection and portfolio growth.
Expenses and Fees
The fund’s expense ratio should be taken into account by investors since it can have an impact on net returns, particularly over longer investment horizons.
Stay Informed
Investors should keep themselves updated on economic trends, industry developments, and company news impacting the micro-cap space.
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To Wrap Up
Microcap mutual funds provide access to India’s most promising but volatile businesses, which have the potential for significant long-term growth. They are most appropriate for investors who appreciate diversification, expert management, and have patience while taking measured risks.Â
By conducting a thorough analysis, setting reasonable expectations, and sticking to the investment plan, an investor can profit from this dynamic industry while mitigating the risks.
