When investors have the willingness to take short term positions and the ability to bear a certain degree of risk, small-cap funds could be the correct choice. These funds generate significant demand driven sales during a market upswing, which lead to an increase in their prices. Smaller firms also look to continuously reinvest their profits back into their business. This reassures shareholders of superior performance and higher profit potential from such companies. Small Cap funds therefore make excellent additions to a well-diversified portfolio.

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.

The fund manager is Arnold C. Schneider III and he has managed this small-cap mutual fund since 1998.

Walthausen Small Cap Value ( WSCVX - MF report ) focuses on purchasing common stocks of small cap companies which have the ability to grow invested capital. The firms invested in must have market capitalizations of $2 billion or lower. This small-cap mutual fund returned 26.88% over the last one year period.

The small-cap mutual fund has an expense ratio of 1.32% compared to a category average of 1.40%.

Franklin International Small Cap Growth Advisor ( FKSCX - MF report ) seeks capital growth over the long term. The fund invests the majority of its assets in a wide range of tradable equity and related securities of small foreign companies. It focuses on purchasing common stock. This small-cap mutual fund returned 23.00% over the last one year period.

The fund manager is Edwin Lugo and he has managed this small-cap mutual fund since 2006.

Huber Capital Small Cap Value ( HUSIX - MF report ) invests the majority of its net assets in common stocks issued by small cap companies. These firms must be those which are attractively priced relative to their underlying value. It focuses on acquiring domestic securities. However, it may invest up to 20% of its assets in foreign securities. This small-cap mutual fund returned 22.07% over the last one year period.

As of December 2012, this small-cap mutual fund held 46 issues, with 5.89 of its total assets invested in CNO Financial Group, Inc.

Direxion Monthly Small Cap Bull 2X ( DXRLX - MF report ) seeks to provide returns which are twice as much as the monthly performance of the Russell 2000 Index. A large share of the fund’s assets is invested in securities which provide exposure to the index. This small-cap mutual fund returned 23.91% over the last one year period.

The small-cap mutual fund has an expense ratio of 1.90% compared to a category average of 1.32%.

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.