Are Microcap Mutual Funds Worth Investing in?

Microcap mutual funds are drawing investor attention as India witnesses a strong rally in small and micro-sized companies. These funds primarily invest in firms ranked below 500 by market capitalisation, often young businesses with high growth potential but limited stability. While returns can be spectacular in bull markets, sharp corrections can erase gains quickly, making them suitable only for investors with high-risk tolerance and long investment horizons.

Currently, the Motilal Oswal Nifty Microcap 250 Index Fund is India’s only pure microcap fund, launched in July 2023. It offers investors diversified exposure to the smallest 250 listed companies in a low-cost, index-tracking format. Active microcap funds are still evolving, with Bandhan Mutual Fund leading the way in seeking approval for India’s first managed microcap scheme.

India’s microcap outlook remains structurally positive, supported by domestic growth, government reforms, and industrial innovation. Yet, valuations appear stretched, and short-term volatility is likely as markets cool from euphoric levels.

Investors should limit exposure to 5–10% of their equity portfolio and preferably invest through SIPs to reduce timing risk. Microcaps can boost long-term wealth but should remain a satellite portion of one’s portfolio—meant for patient investors who can withstand sharp ups and downs.