Introduction
Want to invest in high growth stocks but prefer not to pick individual small cap stocks? You’re not alone. Many young investors across India are looking for the safest and best small cap ETF to invest in so they can discover the beauty of small-cap companies without the hassle of researching each stock.
Exchange Traded Funds (ETFs) have become the vehicle of choice for investors because they combine all three things: diversification, liquidity and simplicity of investing. For small caps, that yield high-growth but also high-risk investments, ETFs are becoming a more intelligent way to have exposure to that space.
This article will provide the following:
- Explanation of small cap ETFs and how they function
- The 5 best small cap ETFs in India (2025) with returns, risks, and expense ratios
- How to select the most appropriate ETF for your objectives
- FAQs for first-time small cap ETF investors
Let’s get started!
What Is a Small Cap ETF and How Does It Work?
Small Cap ETFs are a collection (also referred to as “basket”) of small-cap stocks that trade on a stock exchange just like a share. Whole doing this may be quite risky and time-consuming, you would invest in an ETF that tracks a small-cap index, such as the Nifty Smallcap 250 Index.
How it works:
- An AMC (Asset Management Company) brings the ETF to market.
- The ETF tracks the performance of the index (e.g., Nifty Smallcap 250).
- You can buy and sell ETF units on NSE/BSE through your demat account.
What are the benefits of Small Cap ETFs?
- Diversification – Your risk is spread across hundreds of small companies.
- Potential for Growth – Small caps often outperform large caps in bullish markets.
- Low Cost – ETF’s usually have lower expense ratios than mutual funds.
- Liquid –Can be traded any time during market hours.
In summary, for a MINIMAL COST you get the growth of small companies, along with the simplicity of an index fund.
There are a wide variety of Small Cap ETFs that are both popular and trustworthy. The selection of the best 5 is provided below.
1. Nippon India Nifty Smallcap 250 ETF
- 5-Year Return (CAGR): ~24.8%
- Expense Ratio: 0.25%
- Index Tracked: Nifty Smallcap 250
- Risk Level: High
- Best For: Aggressive investors with a long-term wealth creation horizon through SIP investments.
This is the oldest and most liquid small-cap ETF in India and is top of mind for retail investors.
2. ICICI Prudential Smallcap 250 ETF
- 5-Year Return (CAGR): ~23.5%
- Expense Ratio: 0.30%
- Index Tracked: Nifty Smallcap 250
- Risk Level: High
- Best For: Investors who are comfortable with ICICI’s excellent ETF initiatives.
A good alternative to Nippon’s ETF with respectable tracking quality.
3. Motilal Oswal Nifty Smallcap 250 Index Fund (ETF)
- 5-Year Returns (CAGR): ~22.9%
- Expense Ratio: 0.35%
- Index Tracked: Nifty Smallcap 250
- Risk Level: High
- Best For: Investors who prefer the assurance of consistent exposure via Motilal’s brand of index funds.
Motilal has made its name as a passive fund provider making the ETF reliable.
4. Axis Nifty Smallcap 50 ETF
- 5-Year Returns (CAGR): ~25.2%
- Expense Ratio: 0.20%
- Index Tracked: Nifty Smallcap 50
- Risk Profile: Very High (only tracks 50 stocks)
- Best Suited for: Femily investors wanting an active strategy, can have experience dealing with volatility.
If you’re looking for more concentrated exposure, this ETF may be a better option, and therefore is higher risk and opportunity.
5. HDFC Nifty Smallcap 250 ETF
- 5-Year Performance (CAGR): ~23.1%=
- Management Fee: 0.28%
- Index Tracked: Nifty Smallcap 250
- Risk Rating: High
- Best Fit: Long-term investors who are confident in HDFC’s strong organizational capacity, including their history of good fund management.
Dangers of Investing in small cap ETFs
Despite the attractiveness of small cap ETFs, they carry their share of risks:
- Volatility –Small caps can rise quickly and fall fast during market corrections.
- Liquidity Risk – Sometimes ETFs won’t trade low volumes which can alter your ability to buy/sell.
- Market Cycles – Small caps perform well in bull markets, but they tend to turn when the economy slows.
- Tracking Error – ETF returns can differ marginally from the index due to costs or inefficiencies.
For Example: during the 2020 pandemic crash many investors lost a lot of money when the Nifty Smallcap 250 index dropped over 40% in two months. This was exacerbated by emotion when those investors sold at the bottom.
Returns & Performance Comparison Table
| ETF Name | 5-Year Return (CAGR) | Expense Ratio | Index Tracked | Risk Level | Best For |
| Nippon India Nifty Smallcap 250 | ~24.8% | 0.25% | Nifty Smallcap 250 | High | Long-term SIP investors |
| ICICI Prudential Smallcap 250 | ~23.5% | 0.30% | Nifty Smallcap 250 | High | Conservative ETF investors |
| Motilal Oswal Nifty Smallcap 250 | ~22.9% | 0.35% | Nifty Smallcap 250 | High | Passive investing enthusiasts |
| Axis Nifty Smallcap 50 | ~25.2% | 0.20% | Nifty Smallcap 50 | Very High | Aggressive, high-risk takers |
| HDFC Nifty Smallcap 250 | ~23.1% | 0.28% | Nifty Smallcap 250 | High | Long-term investors |
How to Pick the Small Cap ETF for You
You have to consider the following when choosing the right small cap ETF:
- Investment Horizon: 5 or more years minimum to weather the volatility.
- Expense Ratio: Lower expenses = better long-term returns.
- Tracking Error: Review the fund’s reports to see how well the ETF tracks the index.
- Liquidity: Choose ETFs with more trading volume (like Nippon India’s).
- Risk Tolerance: Are you able to handle being up and down dramatically?
SIP vs Lump Sum
- SIP is best for beginners since it smooths the deposits over time.
- Lump sum may work fine in bullish periods, but timing is more difficult.
Small Cap Stocks
Small cap ETFs are a simple method for investing in a collection of small cap stocks without needing to look at hundreds of companies, which keeps your time spent on due diligence low, leverage or reduce any stock-specific risk, and gives you broader exposure to the high growth businesses in India.
If you are interested in building a portfolio of direct small cap stocks instead of ETFs, look at our complete beginner’s guide here.
Small Cap ETFs vs Nifty Bees
You can expect high growth from small cap ETFs, but also a high level of volatility. Nifty Bees is an ETF, but it tracks the Nifty 50 index which holds the largest companies from India. This quiets volatility, and provides more stability, but offers much lower potential returns compared to small caps.
Are you more suited to stable then high growth? Look at our full analysis on Nifty Bees to help you determine if it fits your long-term portfolio.
FAQs – Quick Questions for Investors
- Can I invest in small cap ETFs through an SIP?
Yes! Most brokers do allow monthly SIP’s into ETFs (but some may require manual buying each month(via brokerage account, maybe this is what they mean).
2.Small cap ETFs vs small cap mutual funds – are they safer?
No. Both are very risky. ETFs have lower costs, but mutual fund investors receive the benefit of professional fund management.
- Do small cap ETFs pay out dividends?
Some do, but most investors are better off taking the growth (capital appreciation) path i.e. do leave the dividends in the fund for growth.
4 What is the minimum investment required?
You can a small cap etf for as little as the price of one unit of an etf, usually between 50 and 200 in India.
Conclusion
Small cap ETFs are a very easy way to invest in India’s growth story without spending hours looking at individual companies. They provide one of the best combinations of diversification, low hassle investing, and the opportunity for better returns, along with a high level of risk.
Do keep in mind: high-risk high-return products only start with high return potential at entry, high risk is pretty consistent on all products.
Choose the best small cap ETF based on your investment objectives, be a size small as possible, and hold it for the long term.
Choose one that best suits your style and get started, because it won’t take long for your small investments to turn into large investments over time if you invest sensibly in the right ETF’s.
Which is your favourite small cap ETF? Let me know in the comments, or share this article with a friend who might need some help in diversifying their portfolio.