February 9, 2026
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Cheapest Small-Cap Mutual Funds That Still Beat the Market: Low Cost, High Conviction Returns
Small-cap mutual funds have had a bumpy ride over the past year. In fact, 2025 turned out to be one of the weakest years for the small-cap category, with sharp volatility, uneven performance, and several schemes delivering flat-to-negative short-term returns.
Yet, amid this turbulence, a select set of low-cost small-cap funds quietly stood their ground—delivering over 20% CAGR across three years, despite charging expense ratios below 0.50%. That combination is rare, and powerful.
This analysis focuses on five of the cheapest small-cap mutual funds (Direct plans) that have proven one important investing truth:
👉 Costs matter most when markets test your patience.
Why Expense Ratio Is a Game-Changer in Small-Cap Funds
Expense ratio may look insignificant—0.40% versus 0.80%—but in small-cap investing, it can make a dramatic difference.
Small-cap funds typically involve:
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Higher portfolio churn
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Frequent stock rebalancing
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Greater volatility and drawdowns
When returns slow down—as they did in 2025—a higher expense ratio eats directly into investor gains. Low-cost funds reduce this drag, helping investors retain more returns during downturns and compound faster during recoveries.
Over a 10–15 year investment horizon, even a 0.30–0.40% cost difference can translate into lakhs of rupees of additional wealth.
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% |
These expense ratios are well below the small-cap category average, offering a clear structural advantage for long-term investors.
Performance Check: Low Cost, Strong Compounding
| 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% |
While one-year returns currently hover between 4% and 7%, the three-year CAGR remains comfortably above 20% for all five schemes.
This contrast highlights a crucial lesson: short-term noise fades, long-term discipline pays.
What Long-Term Investors Should Take Away
The past year has reinforced a hard truth—small-cap funds can severely test investor patience. But it has also highlighted what truly works over time:
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Low expense ratios
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Consistent fund management
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Staying invested through volatility
For investors with high risk appetite and long-term horizons, focusing on cost efficiency and fund quality, rather than chasing short-term returns, can significantly improve outcomes. History repeatedly shows that time in the market matters more than timing the market—especially in small caps.
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