Microcap Funds in India: Why Microcaps Beat Large, Mid and Small Caps in 2026
Last updated: 26 October 2026
Quick answer: Microcap funds invest in companies ranked roughly 501st to 750th by market value. In 2026 the Nifty Microcap 250 index returned 16.9% to 30 September, while the Nifty Smallcap 250 gained 7.2% and the Nifty 50 fell about 13%. Valuations have eased but remain far from cheap, and microcaps can fall 50% or more in bad years, so keep them a small satellite holding of 5–10% of your equity, invested through SIPs for 7 years or more.
Last updated: 26 October 2026 Quick answer: Microcap funds invest in companies ranked roughly 501st to 750th by market value. In 2026 the Nifty Microcap 250 index returned 16.9% to 30 September, while the Nifty Smallcap 250 gained 7.2% and the Nifty 50 fell about 13%. Valuations have eased but remain far from cheap, and microcaps can fall 50% or more in bad years, so keep them a small satellite holding of 5–10% of your equity, invested through SIPs for 7 years or more. Key takeaways 2026 leader: Nifty Microcap 250 +16.9% to 30 September vs about −13% for the Nifty 50. Valuation: P/E about 24–27, below its 5-year median of about 29, but not cheap. Risk: thin liquidity and very deep drawdowns in sell-offs. Allocation: 5–10% of equity, 7+ year horizon, through SIPs. What are microcap funds? SEBI classifies the top 100 listed companies as large caps, numbers 101 to 250 as mid caps and everything from 251 down as small caps. Microcaps sit at the far end of that small-cap universe. The Nifty Microcap 250 index tracks 250 companies ranked roughly 501 to 750 by full market capitalisation, and microcap funds either track this index or invest actively in similar stocks. How microcaps performed in 2026 Index (total return) 2026 to 30 Sep P/E (30 Sep) Nifty Microcap 250 +16.9% 27.3 Nifty Smallcap 250 +7.2% 34.5 Nifty 50 about −13% — Source: NSE index factsheets as of 30 September 2026. Microcap 250 five-year CAGR: 21.7%. Microcaps rose while large caps fell, helped by strong earnings in many smaller manufacturing and capital-goods companies and by domestic SIP flows. By 23 October the index P/E had eased to about 24, below its five-year median of about 29, after the broader October sell-off. Can microcap funds sustain the gains? Nobody can say for certain. Market experts expect future gains to be stock-specific rather than broad-based, and warn that highly valued stocks could correct sharply. History is a guide: in 2018 and early 2020, microcap indices fell far more than large caps, and recoveries took years for some stocks. Liquidity risk: many microcaps trade thinly, so prices can gap down quickly and index funds can show higher tracking error. Volatility: annual swings of 40–60% are possible, in both directions. Quality risk: smaller companies are more exposed to governance problems, debt and business concentration. How to invest in microcap funds The main passive option is the Motilal Oswal Nifty Microcap 250 Index Fund (launched in July 2023; about ₹2,410 crore AUM, direct plan expense ratio about 0.43%). Some flexi-cap, small-cap and thematic funds also hold microcaps. Before investing: Treat microcaps as a satellite holding, at most 5–10% of your equity portfolio. Invest through SIPs or staggered STPs, not a lump sum after a strong run. Hold for at least 7 years and be prepared for sharp falls along the way. Check your existing small-cap and flexi-cap funds first, as you may already own microcaps. Tax is the same as for other equity funds: 20% on gains within 12 months and 12.5% on long-term gains above ₹1.25 lakh a year. Is a microcap allocation right for your portfolio? Talk to Money n Wealth (/contact) for a portfolio review that sizes satellite bets like microcaps around your goals. This article is for general educational purposes only and does not constitute financial advice. Figures and examples are illustrative. Please consult a qualified financial adviser for guidance specific to your situation. Money n Wealth (Predics Fintech Services Pvt Ltd) is an AMFI-registered Mutual Fund Distributor (ARN-121995) and APMI-registered PMS Distributor (APRN07444); it is not a SEBI-registered investment adviser and may earn distribution commission on investments made through it. Insurance is the subject matter of solicitation.
Frequently Asked Questions
What is the difference between small cap and microcap funds?
Small cap funds invest mainly in companies ranked 251 and below by market value, focusing on the larger end of that range. Microcap funds go further down, typically to companies ranked about 501 to 750, which are smaller, less liquid and more volatile.
Are microcap funds good for SIP investors?
They can be used as a small satellite allocation through SIPs for investors with a 7-year or longer horizon and high risk tolerance. SIPs help average the cost through the sharp ups and downs typical of microcaps.
How much should I invest in microcap funds?
Most investors should keep microcaps to 5–10% of their equity portfolio at most, after accounting for microcap stocks already held through small-cap or flexi-cap funds.
How are microcap funds taxed?
They are taxed like other equity mutual funds: 20% short-term capital gains tax within 12 months, and 12.5% long-term capital gains tax above ₹1.25 lakh a year after 12 months.