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The small cap category of equity mutual funds is considered to be the best example of 'high-risk, high-return' when it comes to wealth creation in the Indian stock market. Although there is more volatility in the short term, but for those investors who have been patient and maintained their SIPs and investments for 10 years or more, these funds have proven to be true 'profit machines'. Small cap funds invest in emerging companies (companies ranked below 251 in terms of market cap) that have immense potential to become mid-cap and large-caps in the future. If we look at the historical performance of the last 10 years, the top 7 small cap funds have given investors compound annual returns (CAGR) ranging from 17% to 22%. Top 7 small cap funds that have given record profits in the last 10 years Track record of the 7 leading small cap funds that have given top returns in the last decade under Direct Plan – Growth: Fund Name 10 year CAGR return (%) 10 years ago Value of ₹ 1 lakh lump sum today Value of ₹ 10,000 monthly SIP (total investment ₹ 12 lakh) Fund Fund Size (AUM) 1. Nippon India Small Cap Fund ~21.4% ₹6.95 lakh ~₹38.5 lakh ₹78,900+ crore 2. Quant Small Cap Fund ~20.9% ₹6.67 lakh ~₹37.2 lakh ₹34,000+ crore 3. Axis Small Cap Fund ~19.6% ₹5.98 lakh ~₹34.4 lakh ₹30,000+ crore 4. SBI Small Cap Fund ~19.1% ₹5.74 lakh ~₹33.3 lakh ₹39,900+ crore 5. Sundaram Small Cap Fund ~18.2% ₹5.32 lakh ~₹31.5 lakh ₹3,900+ crore 6. DSP Small Cap Fund ~18.0% ₹5.23 lakh ~₹31.0 lakh ₹20,200+ crore 7. HDFC Small Cap Fund ~17.7% ₹5.10 lakh ~₹30.4 lakh ₹41,600+ crore (Note: The figures are based on historical annual returns of Direct Plan Growth options. Past returns in mutual funds do not guarantee the same rate of return in the future.) Keep these 4 things in mind while investing in small cap funds Minimum 7 to 10 year perspective: Small cap stocks tend to fall sharply during market downturns. Therefore, invest only that money which is not needed for the next 7 to 10 years. Adopt the SIP route: Instead of investing lump sum, invest through Systematic Investment Plan (SIP). Due to this, more units are available when the market falls and one gets the benefit of 'rupee cost averaging'. Limited allocation in portfolio: According to financial advisors, any investor should keep only 15% to 25% of his total equity portfolio in small caps, the remaining capital should be in large-cap, flexi-cap or hybrid funds. Keeping an eye on AUM and cash flow: Having a very large fund size (AUM) makes it challenging for the fund manager to buy and sell small cap stocks. Therefore, regular review of the AUM and portfolio turnover ratio of the fund is necessary.