When it comes to selecting mutual funds for investment, there are various criteria available to evaluate them. Among many, two key parameters are good fund ratings and low expense ratios. So in this write-up, we will review three 5-star rated, lowest expense ratio small-cap mutual funds that have grown a Rs 1 lakh investment into more than Rs 5 lakh in the last five years. These funds have given up to 40% returns over the past five years. These schemes have also delivered exceptional returns over both 1-year and 3-year periods. Before we dive into the details of these three small-cap mutual funds, it’s important to understand the significance of fund ratings and expense ratios in mutual fund investing.
How is fund rating so important in MF investing?
Ratings can help you compare different mutual fund schemes within a category and select funds with better risk-adjusted returns. Ratings also help in understanding the potential stability of your investments. Ratings, by Value Research or CRISIL, are a tool that helps in assessing the past performance and risk of a fund. Looking at fund ratings, investors can make informed decisions about their investment.
Also read: 5 top-rated large-cap mutual funds with lowest expense ratio in 2025
What is expense ratio and how is it important?
The expense ratio is the annual operating expenses of a mutual fund scheme, shown as a percentage of the fund’s net assets. Essentially, it’s the percentage of your investment that the fund charges each year to cover its administrative and management costs, according to the Association of Mutual Funds in India (AMFI). So if your fund’s expense ratio is higher, it means you are paying higher fee to the fund house to manage your investment, potentially impacting your overall returns.
Now that we have discussed how crucial fund ratings and expense ratios are as key parameters while identifying a fund for investing. Now, let’s explore the small-cap mutual funds with 5-star ratings by Value Research and the lowest expense ratio. We have shortlisted three mutual fund schemes based on these two criteria. Let’s review their five-year lump sum and SIP performance primarily, along with one- and three-year returns.
Best-rated top 3 small-cap funds with the lowest expense ratios
1. Tata Small Cap Fund
Ratings: 5-star
Expense Ratio: 0.37%
Assets Under Management: Rs 9,418 crore
Launched in November 2018, the small-cap fund from Tata Mutual Fund house has delivered an 8.33% return in the last one year and 26.14% in three years. The fund’s last five-year return stood at 38.96%.
With this rate of return on investment, the fund would have turned Rs 1 lakh into Rs 5,19,130 in just five years.
SIP return: 27.47%
An SIP of Rs 10,000 would have become Rs 11.80 lakh in five years.
2. Bandhan Small Cap Fund
Ratings: 5-star
Expense Ratio: 0.39%
Assets Under Management: Rs 10,244 crore (as of April 30, 2025)
Started in February 2020, the small-cap fund is little over 5-year old. The scheme’s 1-year and 3-year returns have been 18.59% and 33.08%, respectively. It has delivered a 40.19% return in the last 5 years.
An investment of Rs 1 lakh in this fund would be worth Rs 5,42,540 at an annualised return of 40.19% over the last five years.
Bandhan Small Cap Fund’s SIP return: 31.79%
The fund would have turned Rs 10,000 SIP started five years ago into Rs 13.06 lakh now.
3. Invesco India Smallcap Fund
Ratings: 5-star
Expense Ratio: 0.41%
Assets Under Management: Rs 6,200 crore
Launched in October 2018, the fund’s 1-year and 3-year returns are 14.12% and 29.38%, respectively. It has delivered a 37.98% annualised return over the last five years.
A lump sum investment of Rs 1 lakh in this fund made five years ago would have become Rs 5,01,020 now.
SIP return: 28.89%
A Rs 10,000 SIP started five years ago would have turned the investment into Rs 12.20 lakh after five years.
(Data Source: Value Research, fact sheet.)
Also read: HDFC mutual funds: 5 top-performing SIP plans with up to 21% annualised returns in 10 years
Investors are advised not to rely solely on the impressive returns delivered by these small-cap funds over the past five years and review the schemes based on several other yardsticks. Past performance does not guarantee similar results in the future.
It’s also important for investors to keep in mind that the five-year returns may appear attractive because many funds rebounded from a low base after the equity market crash in 2020 during the COVID-19 pandemic.
Also, while investing in small-cap funds, investors must remember that investing in small-cap funds can be riskier as compared to midcap, large-cap or multi-cap funds. Since small-cap companies are subject to high volatility and market fluctuations during economic downturns and unforeseen events, you should carefully decide your portfolio balance and allocate funds in small-cap mutual funds wisely.
Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.
