Large-cap stocks are larger companies (1st – 100th company by market capitalisation) that can offer stable returns with lower volatility.
They are usually market leaders with established business models, steady cash flows, strong balance sheets, and wider institutional ownership. Because of their size and liquidity, price movements tend to be smoother for larger companies than for smaller ones.
Mid-cap stocks (101st –250th) are medium-sized companies that have moved beyond the early growth stage but are not yet industry leaders.
They typically show improving revenues and profitability, with room to expand market share. Volatility is higher than that of large caps, but growth potential is stronger.
Small-cap stocks (251st onwards) are smaller businesses still building scale.
They operate in niche or emerging areas and can grow quickly. However, they are more volatile and more sensitive to economic cycles than mid- and large-cap stocks.
Beyond smallcaps lies an even smaller segment often referred to as microcaps. These are very small, listed companies, typically positioned at the lower end of the small-cap universe by market capitalisation.
Typically, a micro-cap stock is a company with a market capitalisation between Rs 5-10 billion (bn).
Microcaps are defined as the top 250 companies by total market capitalisation after the Nifty 500 companies, as per the Motilal Oswal Microcap fund. The microcap segment represents 3% of the overall listed market capitalisation.
These companies are often early in their growth cycle, operate in niche segments, and may not yet have widespread analyst coverage or institutional participation.
While they have the potential to grow rapidly as their businesses scale, they also carry higher volatility, lower liquidity, and greater sensitivity to business or market shocks.
As a result, returns can be sharp in both directions. In a strong market, they can deliver market-beating returns; in a weak market, they can fall more than the broader market.
This is why microcap funds may be more suitable only for investors with a long-term horizon and a very high risk appetite.
Here is a list of mutual funds that invest in micro-cap stocks, which investors might add to their watchlist.
The list consists of pure micro-cap funds as well as small-cap funds with a strong micro-cap bias.
#1 Motilal Oswal Nifty Microcap 250 Index Fund
Motilal Oswal Nifty Microcap 250 Index Fund, launched in July 2023, is the sole microcap index fund in the market today.
The Nifty Microcap 250 Index provides a wide benchmark for exposure to micro-cap stocks. Some active and passive funds allocate their positions based on the top constituents of this universe.
The fund invests solely in microcap companies, targeting under-researched stocks spread across diverse industries.
As of 31 January 2026, the fund’s Asset Under Management (AUM) was Rs 23.45 bn. The scheme’s expense ratio (Direct Plan) is 0.53% per annum.
The scheme is currently fully allocated to equities. The portfolio is well diversified, with Consumer Discretionary accounting for 22.24%, followed by Industrials (21.94%), Materials (18.55%), Financial (11.26%), and Healthcare (8.77%).
The fund holds 251 stocks, with the top 10 stocks accounting for 12.8%.
Ujjivan SF Bank has the highest weight of 1.7%, followed by CarTrade Tech (1.55%), Lakshmi Machine (1.4%), Acutaas Chemicals (1.38%), and South Indian Bank (1.36%).
The scheme’s price-to-earnings (PE) multiple of 26.2 is in line with the Nifty Microcap 250 (25.9).
The portfolio turnover ratio is low at 0.6, indicating an infrequent churn strategy.
#2 HDFC Defence Fund
HDFC Defence Fund, launched in June 2023, is a thematic equity scheme focused on companies participating in India’s defence and allied sectors.
Since this is a thematic fund, the scheme is mandated to invest at least 80% of its assets in the defence sector.
While not a pure microcap fund, the fund meaningfully allocates to small and emerging defence businesses, many of which fall in the lower end of the market-cap spectrum.
As of 31 January 2026, the fund’s AUM stood at Rs 77.94 bn. The scheme’s expense ratio for the Direct Plan is around 0.82% per annum.
The scheme is almost 98% invested in equities, with 2% cash allocation. Large-cap dominates the portfolio at 54%, followed by mid-cap (18.6%) and small-cap (27.38%).
The portfolio is relatively concentrated, with just 23 stocks, reflecting the strategy’s thematic nature.
Bharat Electronics has the highest weight of 19.49%, followed by Hindustan Aeronautics (13.63%), Bharat Forge (12.32%), Solar Industries (10.64%), and BEML (6.57%).
The fund holds microcap stocks such as IdeaForge, Diffusion Engineers, and Centum Electronics. Though allocation to them remains relatively small.
The micro-cap exposure here is closely tied to the performance of one industry. But this is also supported by long-term policy tailwinds, budget outlays, and strategic collaborations within India’s aerospace and defence sectors.
The scheme’s PE of 51.91 is a premium to the broader market. This suggests valuations already reflect strong earnings expectations.
#3 Quantum Small Cap Fund
Quantum Small Cap Fund, launched in November 2023, is an open-ended small-cap equity scheme that follows a bottom-up stock-selection strategy.
The fund focuses on stocks with a market cap between Rs 4 bn to 249.5 bn and an average daily volume of more than Rs 20 bn.
This is also not a pure microcap fund. Rather, the scheme meaningfully allocates to small businesses, many of which fall in the lower end of the market-cap spectrum.
The fund’s AUM stood at Rs 1.79 bn, while the expense ratio (Direct Plan) is around 0.7% per annum.
The scheme is almost 88.36% invested in equities, with 11.64% cash allocation. Small-cap accounts for 83.64% of the portfolio, followed by large-cap (11.46%) and mid-cap (4.91%).
The portfolio is relatively concentrated, with just 54 stocks and a PE of 20.86. By sector, Financials account for 22.46% of the portfolio, followed by Consumer Discretionary (13.17%), Industrials (18.59%), Materials (13.15%), and Healthcare (12.33%).
Karur Vysya Bank has the highest weight of 3.68%, followed by Supriya Lifesciences (3.5%), CSB Bank (3.01%), Lumax (2.85%), and Axis Bank (2.45%).
The scheme’s PE multiple of 20.86 is a discount to the Nifty Smallcap 250 (26.6).
#4 Samco Active Momentum Fund
Samco Active Momentum Fund, launched in July 2023, is India’s 1st active momentum fund, investing in stocks that exhibit momentum characteristics such as breakouts and price leadership.
The fund uses a proprietary momentum-seeking algorithm to generate superior risk-adjusted returns. It’s not positioned as a dedicated microcap fund.
However, it may allocate to smaller companies when price strength and earnings momentum justify inclusion, thereby creating indirect exposure to microcap and lower small-cap businesses.
The fund scans a universe of 750 stocks, including microcaps, to identify opportunities. In addition, the scheme hedges to protect against downside risk when market momentum is low or absent.
The fund’s AUM stood at Rs 6.63 bn. The scheme’s expense ratio is around 0.92% per annum.
Equity accounted for just 51.1% of the allocation, with the remainder held as cash equivalents. This may reflect challenging market conditions in which broad weakness limits stocks’ ability to sustain upward trends. Hence, the fund may prefer to hold cash.
The portfolio primarily comprises small (35.35%) and mid (39.76%) stocks, with large caps accounting for 24.89%.
The portfolio is relatively concentrated, with just 58 stocks and a PE of 27.96. The valuation is in line with small-cap indices.
By sector, Financials account for 21.39% of the portfolio, followed by Consumer Discretionary (11.12%), Materials (15.75%), Industrials (14.29%), and Healthcare (4.18%).
Religare Enterprises has the highest weight of 6.47%, followed by Aditya Birla Capital (3.24%), Muthoot Finance (3.24%), MCX (3.22%), and RBL Bank (3%).
Consistent with the label, the portfolio turnover ratio is 9.07, indicating a very high churn rate.
#5 Sundaram Financial Services Opportunities Fund
Sundaram Financial Services Opportunities Fund was launched in January 2013.
The fund is a thematic fund mandated to invest at least 80% of its assets in shares of banks and financial services companies. The scheme also maintains exposure to micro-cap financial services companies.
The fund’s AUM stood at Rs 16.76 bn. The scheme’s expense ratio is around 0.76% per annum.
Equity accounted for just 95.86% of the allocation, with the remainder held as cash equivalents (3.34%) and debt (0.8%).
Large-cap accounts for 64.35% of the portfolio, followed by small-cap (23.18%) and mid-cap (12.48%).
The portfolio is highly concentrated, with just 29 stocks and a PE of 14.31, at a discount to Nifty Financial Services (18.2).
However, concentration is high with the top 10 stocks accounting for 69.59% of the portfolio. HDFC Bank has the highest weight of 17.27%, followed by ICICI Bank (11.45%), Axis Bank (9.96%), SBI (6.45%), and DCB Bank (4.81%).
Though sector-specific, the fund seeks scalable micro-cap lending players with a high risk-reward proposition. The fund is a play on India’s domestic lending cycle and financial inclusion.
The portfolio also includes smaller NBFCs such as Equitas and Ujjivan SF Bank, as well as microfinance banks such as Bandhan Bank, which serve self-employed and rural borrowers.
The portfolio turnover is 0.35, indicating a buy-and-hold strategy.
Bottomline
Microcap mutual funds offer exposure to companies in the early stages of growth, where return potential can be meaningful but volatility remains high.
The five funds discussed employ different approaches, ranging from passive indexing to thematic and momentum strategies, each with a distinct risk profile.
Investors should assess allocation size, portfolio concentration, valuation levels, and market conditions before investing.
Microcap exposure can enhance long-term returns, but only within a disciplined, diversified portfolio framework.
Happy investing.
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