Small Cap Index – How It Works And Benefits Of Investing

For Indian investors who have a high risk appetite and are looking for avenues of potential wealth creation in the long term, small cap companies may be a suitable option. A comparatively straightforward way to invest in such companies is through mutual funds that are benchmarked against small cap indices.

In this article, we will discuss the major small cap indices on the BSE and NSE, and how mutual funds and index funds provide exposure to them. We will also talk about the pros and cons of investing in small cap index through mutual funds.

Table of contents

• What are small cap indices?
• What are the major small cap indices on the BSE?
• Funds that track the BSE SmallCap 250
• What are the major small cap indices on NSE?
• Index funds tracking the Nifty Smallcap 250
• Mutual funds that track the Nifty Smallcap 250
• What is the MSCI small cap index?
• What are the advantages of investing in a small cap index?
• What are the risks of investing in small cap indices?

What are small cap indices?

Small cap indices are benchmarks that track the performance of small cap companies. These are companies listed 251 and beyond in terms of market capitalisation on recognised stock exchanges. These are relatively smaller companies with significant room for expansion, offering higher long-term growth potential than large or mid caps. However, such stocks can also be highly volatile.

Small cap indices serve as useful performance indicators for fund managers, retail investors, and analysts evaluating smaller companies in their growth phase.

What are the major small cap indices on the BSE?

On the BSE, one of the key benchmark indices is the BSE 250 SmallCap Index. The BSE Smallcap 250 is a broad-based index that represents the performance of the top 250 small cap companies listed on the Bombay Stock Exchange (BSE).

For Indian investors keen to track small cap performance via the BSE universe, this index is a frequently referenced benchmark. Mutual funds benchmarked against this index may offer potential opportunities for small cap segment exposure.

Other BSE indices offering exposure to this market segment include BSE SmallCap and BSE SmallCap Select Index.

BSE SmallCap represent the bottom 15% of the total market cap of the BSE AllCap, offering exposure to more than 1,000 small cap stocks as of November 2025. Meanwhile, the BSE SmallCap Select Index is a rules-based index comprising the 60 largest and most liquid companies on the BSE SmallCap index.

Funds that track the BSE SmallCap 250

There are three primary ways to invest in stocks listed on BSE SmallCap 250 and other indices: by directly investing in the same stocks on the index, through actively managed mutual funds that are benchmarked against a small cap index and through passively managed index funds or ETFs that track these indices. The portfolios of such passive funds mirror the index and seek to replicate its performance, subject to tracking error (the difference between the index’s performance and that of the fund).

Several mutual fund houses in India offer schemes benchmarked to the BSE Small Cap 250 Index, helping investors gain targeted exposure to India’s vibrant small cap universe.

Investors interested in schemes that track the BSE Small Cap 250 Index may find a comprehensive list on major financial data platforms and mutual fund research portals. Many asset management company (AMC) websites, as well as industry aggregators and regulator-approved resources, publish detailed factsheets that include benchmark details, fund performance, and portfolio composition.

Before investing, it’s advisable to review these sources to compare individual fund offerings, assess historical returns*, and verify that the chosen scheme aligns with your objectives and risk tolerance.

*Past performance may or may not be sustained in future.

What are the major small cap indices on NSE?

On the NSE side, there are several indices for the small cap universe, including:

• Nifty Smallcap 250 Index: A benchmark index covering 250 small cap companies (those listed 251 to 500 from the Nifty 500).
• Nifty Smallcap 100: This tracks the performance of the 100 small cap companies selected from the broader small cap universe.
• Nifty Smallcap 50 Index: This tracks the performance of the 50 small cap stocks selected from the broader small cap universe.

There are also some factor-based small indices that comprise small cap stocks chosen based on certain factors or criteria (quality, momentum etc).

Thus, for Indian investors seeking small cap exposure via the NSE ecosystem, these indices may be an option, though investors should note that small cap investments typically carry higher volatility and liquidity risks compared to large cap investments

Index funds tracking the Nifty Smallcap 250

Passive investing through index funds that track this index has seen increasing interest among investors seeking relatively cost-effective ways to participate in the small cap segment.

For those interested in exploring these options, official disclosures from mutual fund regulators, industry research platforms, and fund issuer websites provide detailed, transparent information to help investors make informed choices.

Mutual funds that track the Nifty Smallcap 250

Several mutual funds in India benchmark their performance to the Nifty Smallcap 250 Index, which represents a broad cross-section of small cap companies. Of these, index funds aim to replicate the index’s performance and provide investors with targeted exposure to the small cap segment of the market. Actively managed funds benchmarked against this index aim to potentially outperform the index over time through strategic stock selection and portfolio management.

What is the MSCI small cap index?

The MSCI Small Cap Index refers to a family of indices compiled by Morgan Stanley Capital International (MSCI) that track small cap stocks in various markets worldwide.

In the Indian context, the MSCI India Small Cap Index measures the performance of the small cap segment of the Indian equity market. It represents roughly the smallest 14% of companies by full market capitalisation in the investable Indian market universe. The index is constructed and rebalanced by MSCI using its methodology, swhich involves criteria like size cutoffs, liquidity, and foreign investor accessibility.

What are the advantages of investing in a small cap index?

Investing in small cap indices through mutual funds may offer several potential benefits, as follows:

1. Potential for wealth creation over the long term: Small companies may potentially grow faster than mature large caps, offering higher potential gains in the long term (7-10 years), subject to market cycles.
2. Diversification: A small cap index gives exposure to a broad basket of companies across different sectors, all in the small cap category.
3. Exposure to emerging sectors and innovation: Small cap indices often include companies from smaller sectors and niche markets that might be underrepresented in large cap indices.
4. Cost-effective passive investing: Index funds tracking small cap indices provide relatively low-cost access to a diversified portfolio.

What are the risks of investing in small cap indices?

While the upside in small caps could potentially be high in some market cycles, the risks are equally significant.

1. High volatility: Small cap stocks often show sharper price swings, especially during market corrections.
2. Liquidity risk: Lower trading volumes may make entry and exit difficult during volatile periods.
3. Business risks: By nature, small companies have less established business models and can be more vulnerable to economic downturns, competition, or mismanagement.
4. Recovery delays: When compared to their large cap counterparts, small cap stocks may experience delayed post-correction recoveries.
5. Asymmetry of information: Investor decision-making may be impacted by knowledge gaps resulting from lower analyst coverage than that of large caps.

FAQs

Which are the major small cap indices on the BSE (formerly Bombay Stock Exchange)?

On the BSE, the benchmark index is considered to be BSE SmallCap 250, which captures the performance of the top 250 small cap companies listed on BSE, and BSE SmallCap, which comprises over 1,000 small cap companies as on November 2025.

Which are the major small cap indices in the National Stock Exchange of India (NSE)?

On the NSE, major small cap indices are the Nifty Smallcap 250 (covering 250 small cap companies) and the Nifty Smallcap 50 (covering the top 50 stocks selected from the small cap universe).

How are companies selected for inclusion in small cap indices on the BSE and NSE?

Companies ranked below the top 250 in terms of full market capitalisation are evaluated for free-float market cap and liquidity, among other factors, before inclusion. Periodic rebalancing ensures compliance.

What is the purpose of tracking a small cap index?

Tracking a small cap index via an index fund or ETF allows investors access to the small cap segment in a diversified rules‑based manner without having to pick individual stocks. It also offers transparency and a relatively low‑cost way to participate in the potential growth of smaller companies while accepting the segment’s higher risk.

What are the advantages of investing in small cap indices?

A tactical exposure to small cap indices may be suitable for a long-term investment strategy because they give you access to newer companies, diversification, and potential growth opportunities over time.

What are the drawbacks of investing in small cap indices?

They are considered riskier because of increased volatility, liquidity issues and comparative lack of analyst coverage. So, they may not be suitable for all types of investors.