With India’s stock market continuing its upward trajectory, a notable shift is taking place among retail and institutional investors. The spotlight is gradually moving away from the high-priced large caps and into smaller segments that still offer high-growth potential. Among these, micro-cap mutual funds are emerging as a niche but powerful investment option for long-term wealth creation.
Micro-cap mutual funds invest primarily in companies that fall below the top 500 listed firms by market capitalization. These businesses are typically young, less tracked by analysts, and often operate in highly specialized or emerging sectors. Their small size comes with higher volatility, but also with the possibility of outsized returns if the companies scale up successfully. This makes micro-cap funds suitable for investors who have a higher risk appetite and a longer investment horizon.
As of mid-2025, the Nifty Microcap 250 Index serves as the main benchmark for this space. It includes firms from a diverse range of industries such as defence electronics, digital infrastructure, specialty manufacturing, and fintech. What makes these funds particularly interesting now is the structural shift in India’s economy, where innovation, localization, and digitization are taking center stage. These trends are creating fertile ground for micro-sized companies to thrive and grow faster than their larger counterparts.
Among the most prominent names in this segment is the Motilal Oswal Nifty Microcap 250 Index Fund. It was India’s first passive fund dedicated to micro-cap stocks and offers a rules-based approach with equal-weighted exposure to 250 small businesses. It has investments in companies such as LMW Ltd., CMS Info Systems, Force Motors, and Equitas Small Finance Bank. The fund is ideal for investors looking for broad exposure to this under-penetrated space without the influence of active fund manager decisions.
Another emerging name in the micro-cap category is the HDFC Defence Fund. While primarily thematic, its high exposure to micro-cap companies in India’s expanding defence ecosystem makes it relevant to this conversation. Its focused portfolio and alignment with the government’s Make in India push allow it to potentially benefit from long-term defence spending. Investors should note that this fund comes with industry-specific risks but may offer strong returns during periods of policy-driven tailwinds.
Quantum Small Cap Fund provides a different flavor. With a value-oriented and conservative investment style, it includes select micro-cap companies based on governance and capital efficiency metrics. This fund might appeal to investors who seek exposure to micro-caps but with a safety net of quality checks. It avoids short-term hype and focuses on consistency in performance rather than chasing momentum.
For investors looking for high momentum and shorter cycles, the Samco Active Momentum Fund offers a quant-driven alternative. Using algorithmic screening of stock trends and relative strength indicators, this fund frequently rotates among trending micro-cap stocks. It does not follow traditional fundamentals, which allows it to benefit from short to medium-term rallies in the space. However, high churn and volatility are part of the ride, and investors must be prepared for wide swings.
Sundaram Financial Services Opportunities Fund, although sector-focused, includes high exposure to micro-cap financial stocks like Equitas and Ujjivan Small Finance Banks. These institutions are growing rapidly by catering to underserved segments in India’s Tier II and Tier III cities. As digital lending expands and formal credit systems deepen, these micro-cap lenders are well positioned to tap into long-term credit demand. The fund’s performance is closely tied to the domestic lending cycle and can do well as financial inclusion progresses.
What ties all these funds together is their connection to India’s next wave of structural growth. From defence to digital banking, micro-cap companies are building critical capabilities for the future. While these investments are not for the faint-hearted, they offer differentiated exposure away from the usual large-cap story. Investors should enter these funds with a minimum time frame of five to seven years and with the understanding that short-term volatility is part of the journey.
If chosen wisely and aligned with personal financial goals, micro-cap mutual funds can be the quiet compounding engines in a diversified portfolio. As always, due diligence and understanding your own risk appetite are key.
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