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?
- Growth characteristics of microcap companies
- Key risks: Volatility and liquidity in the microcap segment
- Microcap vs. large and mid caps
- Accessing microcap exposure through mutual funds
- Building investment discipline through SIPs
- How to invest in microcaps through mutual funds?
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.
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
Building investment discipline through SIPs
A systematic approach to investing 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.
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.
What documents are required to complete KYC?
KYC typically requires PAN, proof of identity and address (such as Aadhaar), and bank account details, in accordance with regulatory requirements for mutual fund investments in India.
