The Indian equity market has expanded significantly over the past decade and, alongside large cap and mid cap segments, investors have also begun exploring smaller listed companies positioned lower in the market capitalisation spectrum.
Within this broader universe, the term “microcap” is commonly used to describe very small listed companies. One way to get indirect exposure to this segment is through mutual funds investing in companies that are relatively smaller in terms of market capitalisation. Understanding such mutual funds requires recognising both their potential for long-term growth and the higher risks associated with investing in relatively smaller businesses.
Table of Contents
What are micro-cap mutual funds?
SEBI does not recognise “microcap mutual fund” as an official mutual fund category, nor does it define microcap stocks. Under SEBI’s market capitalisation classification framework, listed companies are categorised as large cap (ranked 1–100), mid cap (101–250), and small cap (251 and beyond) based on market capitalisation on recognised stock exchanges.
In market practice, however, companies ranked roughly beyond the top 500 listed firms by market capitalisation are often referred to as microcap companies. This classification is not defined or recognised by SEBI but is occasionally used by market observers to describe the smallest listed companies.
For instance, indices such as the Nifty Microcap 250 Index track companies ranked after the top 500 companies using free-float market capitalisation methodology.
Key Takeaways
- There is no official SEBI category of microcap stocks, it is an informal market classification.
- Companies outside the 500 largest listed businesses are commonly described as microcaps, although the precise definition can vary.
- Some mutual funds may provide microcap exposure, depending on their investment mandate.
- Microcap companies may offer higher long-term growth potential, but limited liquidity, sharp price movements and business-specific uncertainties make this a particularly high-risk segment.
- Microcap exposure may be better suited to investors with a long investment horizon and the ability to withstand substantial fluctuations in portfolio value.
Funds investing in such companies may operate within existing categories such as small cap funds, flexi cap funds, or thematic equity funds rather than a dedicated microcap category.
Microcap companies are listed entities subject to the same disclosure standards, regulatory requirements, and exchange compliance norms applicable to other listed companies.
Also Read: Multi Cap vs Mid Cap Mutual Funds: Which one to Choose?
Growth characteristics of microcap companies
Microcap companies are often relatively early-stage businesses that may be expanding operations, building market share, or developing specialised capabilities.
Some companies operate in niche industries such as specialised manufacturing, engineering services, industrial components, or emerging technology segments. As businesses scale and institutional participation increases, certain companies may transition into the small cap or mid cap segments over time.
However, growth outcomes remain uncertain and depend on execution capability, governance standards, industry dynamics, and economic conditions.
Key risks: Volatility and liquidity in the microcap segment
While all equity funds are typically categorised as very high risk by SEBI, microcap investing may involve higher levels of risk compared with investments in comparatively more established companies.
- Liquidity risk: Trading volumes in microcap stocks are generally lower than those of large cap or mid cap companies. During periods of market stress, buying or selling positions may become difficult without price impact.
- Higher price volatility: Microcap stocks may experience sharper price movements due to lower institutional participation, earnings uncertainty, or company-specific developments such as management changes or business execution risks.
- Information and governance risk: Smaller companies may have shorter operating histories or evolving governance structures, which may increase uncertainty for investors.
Given these factors, fund manager research, diversification, and risk management play an important role when mutual funds invest in this segment.
Microcap vs. large and mid caps
The choice between these categories usually boils down to an investor’s appetite for risk and their time horizon.
| Parameter | Large caps | Mid caps | Microcaps |
| Market cap rank | 1st – 100th | 101st – 250th | Beyond 500th companies (informal classification) |
| Risk profile | Relatively lower risk among equity categories | More volatile than large caps but less than small and microcaps | Highest risk in the category |
| Volatility | Relatively steady | Higher than large cap | Generally, the highest in the category |
| Liquidity | Generally high | High to moderate | Could be limited in certain market phases |
Accessing microcap exposure through mutual funds
Investors may access microcap exposure indirectly through diversified equity mutual funds.
Some mutual funds allow participation in smaller companies (subject to the scheme mandate and other statutory norms) through pooled investments, professional portfolio management, and diversification across multiple stocks. Systematic Investment Plans (SIPs) enable investors to invest smaller amounts periodically instead of making a single large investment.
Minimum investment amounts vary across schemes and platforms, and SIP facilities may help investors participate gradually over time.
Also Read: What Is a Small Cap? Meaning, Risks & How to Invest
Benefits of microcap exposure
Investing in microcaps through mutual funds may offer the following potential benefits:
- Access to smaller businesses: Investors can participate in companies that may have larger room to grow over time.
- Professional stock selection: Fund managers assess the business, management, financials and valuation before investing.
- Diversification: Compared to independent stock selection, a fund may spread exposure across a broader set of microcap stocks.
- Part of a wider portfolio: Microcap exposure can add a higher growth-oriented element to an investor’s overall equity allocation.
Building investment discipline through SIPs
A systematic approach to investing in microcaps may help manage market uncertainty over long investment horizons.
- Long-term compounding potential: Regular investing over extended periods may support potential wealth creation through compounding, subject to market performance.
- Rupee cost averaging: Periodic investments distribute purchase timing across market cycles. Investors acquire more units when markets decline and fewer units when markets rise, which may moderate the impact of volatility over time.
- Behavioral discipline: Automated investing may reduce the tendency to react emotionally to short-term market movements or attempt market timing.
Who may consider microcap exposure?
Microcap exposure may be considered by investors who:
- Have a very high risk appetite and can tolerate sharp fluctuations in portfolio value.
- Have a long investment horizon and are unlikely to need the invested money in the near term.
- Already hold a diversified core portfolio and want limited exposure to smaller companies with growth potential.
- Understand that low liquidity may make microcap stocks harder to buy or sell during periods of market stress.
- Are willing to review the scheme’s portfolio, strategy and risk level rather than invest based only on recent performance.
Microcap exposure may not be suitable for short-term goals, essential savings or investors seeking relatively stable returns.
How to choose a mutual fund with microcap exposure?
Since there is no separate SEBI category for microcap mutual funds, investors looking for microcap exposure would need to consider schemes whose mandate allows investment in smaller companies. A few things to consider:
- Look at the portfolio: Check how much the fund invests in very small companies and whether that exposure suits your goals.
- Understand the stock selection: Review how the fund identifies and evaluates microcap companies.
- Check diversification: See whether the exposure is spread across different companies and sectors.
- Be prepared for volatility: Microcap stocks can see sharper price swings and may be less liquid.
- Consider your time horizon and risk appetite: Microcap exposure may suit investors with a long-term horizon and very high risk tolerance.
Evaluating recent returns can provide perspective, but they should not be the main reason for choosing a fund. The portfolio, strategy and risk level may offer a broader view. Past performance may or may not be sustained in future.
How to invest in microcaps through mutual funds?
A useful step-by-step guide:
1. Evaluate financial goals, investment horizon, and risk appetite before considering equity funds with exposure to smaller companies.
2. Review scheme information documents, investment strategy, expense ratio, and portfolio allocation.
3. Complete the mandatory Know Your Customer (KYC) process.
4. Invest directly through the asset management company, registered mutual fund distributor, or authorised investment platform.
5. Choose between lump sum investment or SIP based on financial planning needs.
6. Link a bank account to facilitate transactions and systematic investments where applicable.
Conclusion
Microcap exposure within mutual funds represents participation in relatively smaller listed companies positioned at earlier stages of business development. While this segment offers potential opportunities for long-term growth, it also involves higher volatility, liquidity constraints, and business risks. Such investments may be considered only as a limited allocation within a diversified portfolio by investors with a very high risk appetite and long investment horizon.
FAQs
What is the definition of a microcap company in India?
SEBI does not formally define microcap companies. The term is commonly used to describe listed companies ranked beyond the top 500 by market capitalisation.
Are mutual funds investing in microcaps relatively less risky than investing directly in microcap stocks?
Mutual funds provide diversification and professional portfolio management, which may help manage company-specific risk. However, funds investing in microcap companies remain very high risk equity investments.
Can I start investing with Rs. 100 per month?
Some mutual fund schemes and investment platforms offer SIP facilities starting from relatively small investment amounts, subject to scheme-specific minimum investment requirements.
What is the difference between a microcap and small cap?
Small cap funds invest in companies ranked 251st onwards by market capitalisation as defined by SEBI. Microcap exposure typically refers to companies ranked beyond 500th and may involve higher volatility and liquidity risk.
Are microcap mutual funds the same as small cap mutual funds?
No. Small cap funds are a SEBI-recognised category that must invest at least 65% of their assets in small cap companies, which are ranked 251st onwards by market capitalisation on recognised stock exchanges. The term ‘microcaps’ generally refer to listed companies ranked 501 and beyond, but this is not an official term defined by SEBI and there is no microcap mutual fund category. However, some small cap funds or other mutual funds may include micro caps in their portfolio.
What are micro cap stocks in mutual fund portfolios?
Micro cap stocks are holdings in early-stage listed companies within a mutual fund portfolio. Their role can vary by scheme, depending on the fund’s mandate, investment strategy and the fund manager’s view of opportunities.
Why do mutual funds invest in micro cap picks?
Mutual funds may invest in selected micro cap stocks for their growth potential, specialised business models or emerging opportunities. Fund managers typically assess factors such as business quality, management, financial strength and valuation before adding them to the portfolio.
Are micro cap picks suitable for long-term investors?
Micro cap exposure may suit long-term investors who have a very high risk appetite and can tolerate sharp price movements. It may be less suitable for short-term goals or for investors who prefer more stable investment values.
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