Small-cap mutual funds are the preferred choice of investors willing to take a certain amount of risk while holding short term positions. 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. When markets are booming, small cap mutual funds see high levels of demand which leads to significant increases in their prices. Investors seeking greater diversification would do well by adding 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, investors can click here to see the complete list of funds.

Virtus Small-Cap Sustainable Growth A ( PSGAX - MF report ) seeks capital growth over the long term by investing in small cap stocks whose market capitalization at the time of initial purchase is identical to stocks which are part of the Russell 2000A Growth Index. The small-cap mutual fund returned 19.62% over the last one year period.

The small-cap mutual fund has a minimum initial investment of $2,500 and an expense ratio of 1.67% compared to a category average of 1.47%.

DWS Small Cap Growth A ( SSDAX - MF report ) invests the majority of its assets in securities with equity features identical to US small cap companies. Not more than 20% of its assets may be utilized to purchase foreign and large cap stocks. The small-cap mutual fund returned 11.87% over the last one year period.

Rafaelina Lee is the fund manager and he has managed this small-cap mutual fund since 2008.

Pacific Advisors Small Cap Value A ( PASMX - MF report ) seeks capital appreciation. A large share of the fund’s assets is invested in stocks of companies whose market capitalization is less than $2 billion. It also invests heavily in stocks with market capitalization of less than $500 million, known as micro-cap stocks. The small-cap mutual fund returned 14.35% over the last one year period.

The small-cap mutual fund has a minimum initial investment of $1,000 and an expense ratio of 2.88% compared to a category average of 1.35%.

Legg Mason ClearBridge Small Cap Growth A ( SASMX - MF report ) invests the majority of its net assets in small cap companies and related investments. The fund emphasizes on small US companies with a growth oriented investment style. The small-cap mutual fund returned 10.09% over the last one year period.

As of December 2011, this small-cap mutual fund held 85 issues, with 3.28% of its total assets invested in Taleo Corporation A.

Federated MDT Small Cap Growth A ( QASGX - MF report ) seeks long term capital growth. The fund invests a large share of its assets in equity securities of companies whose market capitalization is identical to securities included in the Russell 2000 A Growth Index. The small-cap mutual fund returned 5.61% over the last one year period.

Frederick L. Konopka is the fund manager and he has managed this small-cap mutual fund since 2008.

To view the Zacks Rank and past performance of all small-cap mutual funds, investors can click here to see the complete list of funds.

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.