Small-Cap ETFs to Invest in India

Do you know that the biggest investment opportunities often hide in plain sight. We all hear about the big companies like Reliance or TCS, but a lot of rapid growth actually takes place in smaller, lesser-known companies that are just beginning to establish themselves. These are the small-cap companies, which have the potential to grow much faster than the giants.

The challenge, however, is that finding these hidden gems can be tough. Not every small-cap company turns into a success story, and betting on just one can be risky. To manage this, investors often need exposure to multiple small-cap stocks in order to diversify and spread their risk. This is where Small-Cap ETFs (Exchange-Traded Funds) come in. An ETF acts like a smart basket of stocks, bundling together dozens of promising small companies in one place, making investing simpler and more efficient.

In this blog, we’ll dive into why so many smart investors are looking to invest in Small-Cap ETFs in 2025 and walk you through some of the best options in the Indian market. 

What is a Small-Cap Company?

These are the listed companies that are ranked by SEBI based on their total value or market capitalization.

• Large Cap : The top 100 biggest companies in the Indian financial markets based on market capitalization are known as large cap companies. These companies are generally stable with strong fundamentals.
• Mid Cap : These are the next 150 companies ranked between 101 to 250. They are relatively well-established businesses that demonstrate steady growth and have significant potential for further expansion.
• Small Cap : These include all companies ranked below 251 by market capitalization. They are typically smaller in size, carry higher risk, but also offer greater growth potential compared to large-cap and mid-cap companies. 

These small-cap companies are often young, dynamic, and have massive room to grow. They could become the big names of tomorrow. But, just like small companies, they are also more sensitive to economic changes and can be very risky.   

What is an ETF?

An ETF (Exchange-Traded Fund) is an investment product that holds a collection of securities, such as stocks or bonds, and trades on the stock exchange just like a regular stock. Instead of investing in one company at a time, an ETF allows you to invest in a whole group of companies in a single purchase.

Think of it like buying fruits: if you wanted apples, bananas, and oranges, you could buy each separately or simply pick up a pre-packed fruit basket that already has a mix of them. An ETF is that fruit basket, but filled with company shares instead of fruits.

A Small-Cap ETF is a basket that contains shares of many small-cap companies. By investing in it, you get exposure to the growth potential of these smaller firms while spreading your risk across a wide range of them, rather than betting on just one.

Read Also: Best ETFs in India to Invest

Small-Cap ETFs for 2025

Now that we know the basics, let’s look at three interesting small-cap ETFs available in India. Think of them as three different types of shopping baskets.

1. HDFC NIFTY Smallcap 250 ETF 

This ETF’s goal is to perfectly copy the performance of an index called the Nifty Smallcap 250. This index is a list of the largest 250 small-cap companies in India. The ETF buys shares of all 250 companies in the same proportion as the index. 

• AUM (Assets Under Management) : Around ₹1,319 crore, this is the total money people have invested in this ETF. A large AUM is a good sign as it shows investor confidence and usually means the ETF is easy to buy and sell.   
• Expense Ratio : This is the small annual fee you pay, 0.20% for HDFC. For every ₹10,000 you invest, you only pay ₹20 per year. This is very low and doesn’t reduce returns that much.   
• Tracking Error : It is around 0.16%, this number tells you how well the ETF is copying its index. A lower number is better, and 0.16% is excellent. It means the fund manager is doing a great job.   
• Liquidity : Very high liquidity, as  millions of units are traded every day, so you can buy or sell it easily without any issues.   

2. Motilal Oswal Nifty Smallcap 250 ETF  

This ETF also tracks the Nifty Smallcap 250 Index, aiming to deliver returns that closely correspond to the performance of the broader small-cap market. Its investment strategy is identical to HDFC’s, as it replicates the index by holding all constituent stocks in the same proportion.

• AUM : Its assets under management is around ₹125 crore, this is smaller than HDFC’s, which is understood for a newer fund.   
• Expense Ratio : This is a bit higher than HDFC’s, approx 0.31%. For a product that does the same thing, you are paying a little more in fees.   
• Tracking Error : Around 0.22%. This is also very low and shows good management, but it’s slightly higher than HDFC’s number.   
• Liquidity : It has good trading volumes, so buying and selling are generally not a problem.   

3. Mirae Asset Nifty Smallcap 250 Momentum Quality 100 ETF  

The Mirae ETF starts with the same 250 small-cap companies but then applies a filter. It picks the top 100 stocks that show momentum, which means companies whose share prices have been rising strongly recently and companies with strong fundamentals, like good profits and low debt. This is called a “smart-beta” or “factor-based” strategy. The idea is to own not just the whole market, but a smarter, potentially better-performing slice of it.   

• AUM : It has an asset under management of around ₹658 crore. This shows that many investors are interested in investing in an ETF with a smart investment strategy.   
• Expense Ratio : This is double as compared to HDFC’s fee around 0.47%. This higher cost is what you pay for the extra research and filtering process.   
• Tracking Error : Around 0.25%, this shows that the ETF is good at following its own special Momentum Quality 100 index.
• Liquidity : Very liquid, with high trading volumes, making it easy to trade.   

Advantages and Disadvantages of small cap ETF to Invest 

Advantages 

• High Growth Potential : Small companies can grow much faster than large, established ones, potentially giving you very high returns.   
• Instant Diversification : With one click, you own a piece of hundreds of companies, if one company does poorly, it doesn’t sink your entire investment.   
• Low Cost : ETFs are much cheaper to own than most mutual funds. Most of your funds stay invested and work for you.   
• Easy to Trade : You can buy and sell them anytime during the market hours, just like a stock.   

Disadvantages 

• High Volatility : The prices of small-cap ETFs can swing up and down instantly, they are not suitable for investors who get affected easily.   
• Economic downturn : During a market downturn or recession, small-cap stocks tend to fall much harder and faster as compared to a large-cap stocks.   
• Long-Term View : To get good returns, you must be prepared to stay invested for a long time, ideally 5 to 7 years or more. 

How to Choose the Right ETF?

Some of the key factors to consider before choosing the right ETF for your financial needs are given below:

1. Expense Ratio : Always check the expense ratio as a lower fee means higher returns for you over the long run.   
2. Tracking Error : A low tracking error means the fund is doing well in the market, showing its efficiency.   
3. AUM and Trading Volume : Look for ETFs with a large AUM and high daily trading volume, this ensures you can buy and sell it easily in the market. 
4. Understand the Index : Know what you are buying. Are you investing in ETF that completely copies the whole index (like with HDFC and Motilal) or uses a special strategy (like with Mirae).   

Read Also: Types of ETFs in India: Find the Best for Your Investment

How to Invest in ETFs?

You can invest in ETFs by following the steps mentioned below:

1. Open a Demat and Trading Account : This is your account for holding and trading shares and ETFs. You can open one online with brokers like Pocketful in a few minutes.   
2. Complete Your KYC : You will need to submit your PAN card, address proof, and other documents for a one-time verification process.
3. Add Funds : Transfer money from your bank account to your trading account.
4. Search and Buy : Open your broker’s app, search for the ETF’s name or ticker, enter the quantity you want to buy, and click ‘Buy’.
5. Monitor Your Investment : The ETF units will appear in your Demat account. You can track their performance on your app. 

Conclusion

Small-cap ETFs can be a powerful tool to build wealth over the long term. They offer an exciting mix of high growth potential and diversification at a low cost. However, they come with high risk and are not suitable for everyone. The right choice for you depends entirely on your personal financial goals, how much risk you are comfortable with, and your investment philosophy. Take your time, do your research, and choose the ETF that feels right for you. Furthermore, it is advised to consult a financial advisor before investing in any stock or ETF.

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