Synopsis: A lower expense ratio may not guarantee higher returns, but it helps investors retain a larger share of their gains over time. This article highlights five low-cost small-cap mutual funds that outperformed the category average over the last three years and shows how fund costs can influence long-term wealth creation.
Mutual fund returns tell you how much your investment has grown, but its expense ratio determines how much of those returns you actually keep. Generating higher returns is only half the story: the cost of earning those returns matters just as much. With the effect of compounding, even a small expense ratio differential could make a difference to net wealth in the future. The real winners are those funds which maintain low expenses while delivering consistent performance.
Top Low-Cost Small Cap Mutual Funds With Strong Returns
1. Bandhan Small Cap Fund
- NAV: ₹55.56
- AUM: ₹28,466.18 Cr
- Expense Ratio: 0.59%
- Exit Load: 1% (within 1 year)
- Performance Snapshot
- 3-Year CAGR: 28.1%
- 3-Year Absolute Return: 115.4%
- Category Comparison (3-Year)
- Fund 3-Year CAGR: 28.1%
- Equity Small Cap Category Average: 19.7%
- Outperformance: +8.4 percentage points
2. ITI Small Cap Fund
- NAV: ₹36.65
- AUM: ₹3,321.83 Cr
- Expense Ratio: 0.85%
- Exit Load: 0.50% (within 3 month)
- Performance Snapshot
- 3-Year CAGR: 26.2%
- 3-Year Absolute Return: 106.0%
- Category Comparison (3-Year)
- Fund 3-Year CAGR: 26.2%
- Equity Small Cap Category Average: 19.7%
- Outperformance: +6.5 percentage points
3. Invesco India Smallcap Fund
- NAV: ₹52.60
- AUM: ₹13,384.88 Cr
- Expense Ratio: 0.65%
- Exit Load: 1% (within 1 year)
- Performance Snapshot
- 3-Year CAGR: 24.2%
- 3-Year Absolute Return: 99.4%
- Category Comparison (3-Year)
- Fund 3-Year CAGR: 24.2%
- Equity Small Cap Category Average: 19.7%
- Outperformance: +4.5 percentage points
4. Mahindra Manulife Small Cap Fund
- NAV: ₹22.64
- AUM: ₹4,930.36 Cr
- Expense Ratio: 0.86%
- Exit Load: 1% (within 12 months)
- Performance Snapshot
- 3-Year CAGR: 23.00%
- 3-Year Absolute Return: 90.3%
- Category Comparison (3-Year)
- Fund 3-Year CAGR: 23.00%
- Equity Small Cap Category Average: 19.7%
- Outperformance: +3.3 percentage points
5. Bank of India Small Cap Fund
- NAV: ₹61.82
- AUM: ₹2,572.40 Cr
- Expense Ratio: 0.69%
- Exit Load: 1% (within 1 year)
- Performance Snapshot
- 3-Year CAGR: 22.6%
- 3-Year Absolute Return: 88.3%
- Category Comparison (3-Year)
- Fund 3-Year CAGR: 22.6%
- Equity Small Cap Category Average: 19.7%
- Outperformance: +2.9 percentage points
How Much Does an Expense Ratio Matter?
Even a small difference in expense ratio can have a meaningful impact on long-term wealth creation because the fee is deducted every year.
Illustrative Example: Impact of Expense Ratio on a ₹10 Lakh Investment
Note: This is a hypothetical illustration assuming both funds generate the same annual return before expenses and differ only in their expense ratio. Actual mutual fund returns are reported after expenses have already been deducted from the NAV, so real-world performance will vary.
Things to Consider Before Investing
- Focus on the fund’s long-term performance rather than short-term returns.
- Check whether the fund has been outperforming the benchmark or the average of its category.
- Review the quality of the fund portfolio and strategy.
- Consider the experience and track record of the fund manager.
- Consider the expense ratio alongside the fund’s overall performance.
- Make sure that the fund meets your investment time frame and tolerance.
- Remember that small-cap mutual funds are highly volatile in nature and therefore are meant for long-term investors.
Bottom line
A lower expense ratio can improve long-term returns, but it shouldn’t be the only factor when selecting a mutual fund. Consider cost alongside long-term performance, portfolio quality, and your investment goals before making a decision.
Disclaimer: The information provided in this article is for educational purposes only and should not be construed as financial advice or investment recommendation. Returns mentioned are based on historical performance and may not be sustained in the future. Mutual fund investments are subject to market risks, including potential loss of capital. Investors are advised to assess their risk appetite and financial goals and to consult a certified financial advisor before investing.
