Small-cap mutual funds are the natural choice for investors willing to take on short term positions and a certain degree of risk. In addition, smaller firms plough back a large portion of their profits back into their business on a regular basis. This assures shareholders of better performance and higher profits in the future. Again, when markets are booming, small cap mutual funds see high levels of demand which leads to significant increases in their prices. Investors looking for greater diversification would do well to consider adding some small cap flavor to their portfolios.

Below we will share with you 5 top rated small-cap mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect these mutual funds to outperform their peers in the future. To view the Zacks Rank and past performance of all small-cap funds, then click here.

Oppenheimer Main Street Small Cap A (OPMSX) seeks capital growth. It invests at least 80% of its assets in small-cap companies. It primarily invests in common stocks of companies with small market capitalizations using quantitative techniques and fundamental analysis. This small-cap mutual fund has a ten year annualized return of 6.3%.

The small-cap mutual fund has an expense ratio of 1.25% compared to a category average of 1.43%.

Wasatch Small Cap Growth (WAAEX) invests heavily in equity securities of small-cap companies. The fund primarily invests in companies with growth potential with market capitalizations less than $2.5 billion. Up to 20% of its assets are utilized to purchase foreign securities issued from mature or developing markets. It is a no-load fund.

This small-cap mutual fund returned 17.5% over the last one year period and has a ten year annualized return of 5.56%.

SouthernSun Small Cap Investor (SSSFX) seeks long-term capital appreciation by investing in small-cap companies. The fund invests heavily in equity securities of companies whose capitalization range has been within the Russell 2000 index for the last year. This small-cap mutual fund returned 16.73% over the last one year period.

The fund manager is Michael W. Cook and he has managed this small-cap mutual fund since 2003.

Eagle Small Cap Growth A (HRSCX) invests the majority of its assets in small-cap companies. These firms must be within the market cap range of the Russell 2000 index at the time of purchase for the last twelve months. The fund seeks out companies which are attractively priced compared to their intrinsic value and has the ability to grow appreciably in the future. This small-cap mutual fund has a five year annualized return of 2.9%.

As of June 2010, this small-cap mutual fund held 73 issues, with 3.52% of its total assets invested in Thoratec Laboratories Corporation.

Prudential Small Cap Core Equity A (PQVAX) seeks long-term capital growth by investing in small-cap companies. Equity securities, primarily common stock and related convertible securities constitute the fund’s major investments. The small-cap mutual fund returned 15.86% in the last one year period.

The small-cap mutual fund has an expense ratio of 1.25% compared to a category average of 1.43%.

To view the Zacks Rank and past performance of all small-cap mutual funds, then click here.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank at http://www.zacks.com/funds.

Zacks Investment Research