The Indian stock market has been bullish recently but a closer look shows up that market leadership is narrow.
A few stocks have captured most of the gains and this has made valuations, especially in large-cap stocks, wite expensive.
Investors are seeking opportunities in segments that are still relatively under-owned— including the micro-cap space.
Certain micro-cap companies are well placed to profit from the next phase of economic growth, particularly in emerging fields such as precision manufacturing, local defence supply chains, and specialised digital platforms.
Micro-cap mutual funds invest mainly in firms with extremely small market capitalisations—usually below the top 500 listed companies.
These tend to be young, under-covered, and high-growth companies in specialised sectors. Due to the high risk profile of these stocks, choosing the right fund is critical for investors.
The Nifty Microcap 250 Index provides a wide benchmark for exposure to micro-cap stocks. Some active and passive funds organise their allocations using top constituents from this universe.
(Source: NSE – Nifty Microcap 250 Index Factsheet)
Here we cover a list of mutual funds based on their investments in micro-cap stocks that investors might put on 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, the first-of-its-kind fund, offers investors passive and diversified access to India’s universe of micro-cap stocks.
Launched in 2023, the fund mirrors the Nifty Microcap 250 Index and has equal-weighted exposure to emerging players across various sectors.
With more than 1% exposure to micro-cap giants like LMW Ltd., Astra Microwave Products, CMS Info Systems, Force Motors, Equitas Small Finance Bank, and South Indian Bank, it provides a broad window into India’s expanding entrepreneurial universe.
By avoiding fund manager bias and adhering to a rule-based approach, this fund allows investors to systematically capture the long-term micro-cap growth story.
However, due to its focus on microcaps, investors need to be ready to face high volatility and enter with a 5–7 year minimum time frame.
#2 HDFC Defence Fund
HDFC Defence Fund although largely a thematic fund with a defence theme, has high micro-cap exposure.
It has over 6% of its portfolio in Astra Microwave Products, a leading defence electronics major in the micro-cap space.
Introduced in June 2023, scheme’s focused portfolio strategy enables it to support high-conviction investments that are the beneficiaries of the ‘Make in India’ initiative and rising defence expenditure.
The micro-cap exposure here is closely associated with the performance of one industry, but it is aided by long-term policy tailwinds, budget outlays, and strategic collaborations within India’s aerospace and defence sectors.
It’s for bold investors willing to add a high-potential, theme-based fund to their core portfolio.
#3 Quantum Small Cap Fund
Quantum Small Cap Fund follows a fundamentally oriented, value-sensitive approach in small-cap investing, with judicious exposure to micro-cap names.
The investment philosophy of the fund focuses on the quality of governance and capital efficiency while avoiding market fashions.
It holds stocks such as CMS Info Systems (2.22%) and Equitas Small Finance Bank (1.79%), given its preference for well-governed companies with stable earnings in a volatile space.
Instead of chasing momentum aggressively, Quantum prioritises risk-adjusted returns and protection of the downside.
It has positioned itself as a fund for conservative investors who desire exposure to the space of micro-caps but with robust quality and valuation filters.
This approach may result in underperformance during times of market euphoria, but works well in the long term.
#4 Samco Active Momentum Fund
Samco Active Momentum Fund offers an entirely unique taste of micro-caps. It takes a rules-based momentum approach to finding short to medium-term opportunities.
The fund currently owns trending micro-cap stocks such as Astra Microwave Products, ITD Cementation India, and Force Motors, which fit into its high-RSI and high-volume criteria.
Introduced in July 2023, the scheme’s quant-led strategy enables the fund to switch rapidly among stocks demonstrating relative strength without being tied solely to fundamentals.
The investment approach is aggressive and investors need to be at ease with high churn and tracking error.
But in a high-momentum environment when micro-cap and small-cap stocks are seeing money flows and technical breakthroughs, this fund could do well.
#5 Sundaram Financial Services Opportunities Fund
Sundaram Financial Services Opportunities Fund has a specialised approach to the BFSI space but curiously has meaningful exposure to micro-cap financial stocks.
With its top holdings including Equitas SFB (2.97%) and Ujjivan SFB (3.25%), the fund is poised to leverage the underpenetrated credit scenario in India, especially in Tier-II and Tier-III markets.
These NBFCs and banks serve self-employed and rural borrowers—segments which are witnessing growth with growing formalisation and digital lending infrastructure.
Though sector-specific, the fund looks for scalable micro-cap lending financial players with a high risk-reward proposition. The fund is a play on India’s domestic lending cycle and financial inclusion.
Conclusion
Incorporating micro-cap mutual funds to a portfolio isn’t so much about timing the market, but more about finding long-term potential in places others where are not looking.
These funds, whether passive, thematic, or quant-based—give access to neglected parts of India’s stock market that conventional portfolios tend to miss.
With innovation, niche manufacturing, and financial inclusion making inroads into the economy, micro-cap companies are silently establishing the foundation for long-term expansion.
For those willing to diversify outside the traditional allocations, this area presents a significant opportunity.
You need to approach these funds with clarity, conviction, and a long-term investing horizon.
Happy Investing.
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