Best Small Cap Mutual Funds

For those investors who want it all, the promise of small-cap stock growth and the steady income that dividends provide, IDCW (Income Distribution Cum Capital Withdrawal) plans from small-cap mutual funds offer a compelling option.

Though small-cap funds are usually associated with rapid expansion, a number of these funds have established themselves by regularly paying out dividends to their investors. If you're someone who appreciates both consistent cash flow and the prospect of building wealth over time, these seven small-cap funds are worth considering.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

Led by Franklin India Small Cap Fund with an impressive 10.05% annual dividend yield, these funds show that small-cap investing isn't just about waiting for capital appreciation, you can enjoy the journey with regular dividend payouts along the way.

Seven Small-Cap Funds with Attractive Dividend Yields

Franklin India Small Cap Fund IDCW

Launched on January 1, 2013, this fund leads the pack with a trailing 1-year dividend yield of 10.05%. It focuses on small-cap companies with strong growth potential. The fund’s portfolio spans multiple sectors such as financial services, consumer cyclical, industrial, healthcare, and basic materials. Some of its top holdings include Aster DM Healthcare, Brigade Enterprises, and Equitas Small Finance Bank. Fund managers R. Janakiraman, Sandeep Manam, and Akhil Kalluri uses a bottom-up approach, carefully picking undervalued companies poised for growth.

Axis Small Cap Fund IDCW

Since its launch on November 29, 2013, Axis Small Cap Fund offers a dividend yield of 8.65%. The fund combines a top-down macroeconomic view with a focus on quality companies, those with strong balance sheets, consistent growth, and resilience during market shocks. With a diversified portfolio of 143 stocks, it keeps concentration lower than the category average. Key holdings include Krishna Institute of Medical Sciences, CCL Products, Multi Commodity Exchange, and Brigade Enterprises. The fund strategically uses market corrections to strengthen its positions in high-potential companies.

HSBC Small Cap Fund IDCW

Launched on May 12, 2014, HSBC Small Cap Fund delivers a dividend yield of 8.35%. It focuses on smaller companies that are gaining market share, operating in niche sectors, or currently undervalued. Using a bottom-up stock selection approach, the fund invests at least 69% of its assets in small-cap companies ranked 251st onwards in terms of market capitalization. This strategy aims to capture alpha opportunities in under-researched and undervalued segments.

PGIM India Small Cap Fund IDCW

A relatively new entrant, launched on July 29, 2021, PGIM India Small Cap Fund offers a dividend yield of 8.22%. The fund actively invests in equity and equity-related securities of small-cap companies, focusing on businesses with strong fundamentals and sustainable competitive advantages. Despite being newer, it has quickly built a reputation for disciplined stock selection and a well-diversified portfolio.

DSP Small Cap Fund IDCW

Launched on January 1, 2013, DSP Small Cap Fund also offers a dividend yield of 8.22%. Around 88% of its portfolio is invested in small-cap companies with emerging growth potential. The fund is particularly suitable for long-term SIP investors, as small-cap funds can be volatile in the short term but offer significant returns over time. Its strategy emphasizes early-stage companies with strong growth trajectories.

Invesco India Small Cap Fund IDCW

Since its launch on October 30, 2018, Invesco India Small Cap Fund provides a dividend yield of 8.22%. It maintains a relatively concentrated portfolio of 64 stocks, which allows the fund to take higher conviction positions. Top holdings include Sai Life Sciences, Krishna Institute of Medical Sciences, Swiggy, and Amber Enterprises. The fund follows a buy-and-hold approach, reflected in a portfolio turnover ratio of 42%, and keeps almost all assets in equities.

Nippon India Small Cap Fund IDCW

Launched on January 1, 2013, Nippon India Small Cap Fund also offers a dividend yield of 8.22%. It maintains a highly diversified portfolio of 235 stocks, much higher than the category average, which helps mitigate risk. With a very low portfolio turnover of 24%, the fund follows a long-term buy-and-hold approach. Its top holdings include Multi Commodity Exchange, HDFC Bank, State Bank of India, and Karur Vysya Bank, balancing small-cap opportunities with quality large-cap exposure.

Conclusion

Small-cap IDCW funds show that investing in smaller companies isn’t just about waiting for long-term capital appreciation. These funds offer the potential for regular income through dividends while staying invested in high-growth businesses. However, dividends are not guaranteed and can vary based on market conditions and fund performance, especially in a volatile segment like small caps.

Investors should also consider tax implications, as IDCW payouts are taxed as per individual income slabs. These funds are best suited for those with a long-term outlook, higher risk tolerance, and a desire for periodic income rather than certainty. When chosen wisely and held patiently, small-cap IDCW funds can add both income and growth potential to a well-balanced portfolio.