Expense ratio may look like a small number on paper, but in equity mutual funds—especially small-cap funds—it plays a far bigger role than most investors realise. This becomes even more important in a category that has seen sharp volatility and uneven returns over the past year.
In 2025, small-cap funds went through a rough phase. Category returns were among the weakest across equity segments, with several schemes delivering flat or even negative returns over shorter periods. In such an environment, low-cost funds with strong long-term performance stand out, as they help investors retain more of their gains when markets eventually recover.
Based on expense ratio as the primary filter, here are five of the cheapest small-cap mutual funds that have still managed to deliver over 20% CAGR over three years—a period that includes both strong rallies and recent volatility.
Lowest expense ratio small-cap funds (Direct plans)
| Fund name | Expense ratio |
| Invesco India Smallcap Fund – Direct Plan | 0.40% |
| Edelweiss Small Cap Fund – Direct Plan | 0.42% |
| ITI Small Cap Fund – Direct Plan | 0.42% |
| Mahindra Manulife Small Cap Fund – Direct Plan | 0.42% |
| Bandhan Small Cap Fund – Direct Plan | 0.47% |
(Source: Value Research)
These expense ratios are significantly lower than the small-cap category average, which makes a meaningful difference over long holding periods, particularly when returns are volatile.
Why expense ratio matters more in small-cap funds
Small-cap investing comes with higher churn, frequent portfolio changes, and greater volatility compared to large-cap or index funds. In years when returns are muted—as seen recently—a higher expense ratio can eat into already modest gains. Low-cost funds, on the other hand, reduce the drag on returns and allow investors to benefit more when markets rebound.
Over a 10–15 year investment horizon, even a difference of 0.30–0.40 percentage points in expense ratio can translate into lakhs of rupees in additional wealth.
How these funds have performed: lump sum vs SIP returns
Despite a challenging last year, all five schemes have delivered strong three-year performance, underlining the importance of staying invested through market cycles.
| Fund | 3-year lump sum CAGR | 3-year SIP CAGR |
| Invesco India Smallcap Fund – Direct Plan | 24.13% | 13.43% |
| Edelweiss Small Cap Fund – Direct Plan | 20.69% | 10.39% |
| ITI Small Cap Fund – Direct Plan | 25.57% | 12.15% |
| Mahindra Manulife Small Cap Fund – Direct Plan | 24.79% | 10.91% |
| Bandhan Small Cap Fund – Direct Plan | 30.19% | 17.77% |
(Source: Value Research)
The data shows that longer holding periods smooth out short-term volatility. While one-year returns for these funds currently range between 4% and 7%, the three-year CAGR remains comfortably above 20% for all five schemes. This gap highlights how short-term market noise often fades over time.
Role of fund ratings in selection
All five schemes are highly rated by Value Research, offering an additional layer of comfort for investors:
5-star rated:
Invesco India Smallcap Fund – Direct Plan – Growth
Bandhan Small Cap Fund – Direct Plan – Growth
4-star rated:
Edelweiss Small Cap Fund – Direct Plan – Growth
ITI Small Cap Fund – Direct Plan – Growth
Mahindra Manulife Small Cap Fund – Direct Plan – Growth
Ratings matter because they assess funds across market cycles, not just recent performance. A strong rating typically reflects consistency, risk-adjusted returns, and portfolio discipline—key factors in a volatile category like small caps.
What this means for long-term investors
The past year has been a reminder that small-cap funds can test investor patience. However, these five schemes show that low costs, strong fund management, and disciplined investing can still deliver solid long-term outcomes.
For investors with a high risk appetite and a long investment horizon, focusing on expense ratio, fund quality, and consistency—rather than short-term returns—can make a meaningful difference. As history shows, staying invested through volatility often allows long-term returns to absorb and average out short-term fluctuations.
Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.