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.

Federated MDT Small Cap Growth A (QASGX) invests the majority of its assets in domestic small cap companies. It focuses on acquiring common stock and invests in firms which are identical to those which are part of the Russell 2000 growth index. The small-cap mutual fund returned 22.52% over the last one year period.

The small-cap mutual fund has a minimum initial investment of $1,500 and an expense ratio of 1.75% compared to a category average of 1.48%.

AllianceBernstein Small Cap Growth A (QUASX) seeks capital appreciation over the long term. The fund invests heavily in equity securities of small-cap companies with market capitalizations of less than $10 million. At any given time the fund invests in between 95 to 125 companies. The small-cap mutual fund returned 10.97% over the last one year period.

Wen-Tse Tseng is the fund manager and he has managed this small-cap mutual fund since 2006.

Homestead Small Company Stock (HSCSX) invests a large proportion of its assets in undervalued stocks of small companies with significant growth potential. The market capitalization of these companies must be identical to firms which are part of the Russell 2000 index. The small-cap mutual fund returned 7.63% over the last one year period.

The small-cap mutual fund has a minimum initial investment of $500 and an expense ratio of 1.17% compared to a category average of 1.45%.

Virtus Small-Cap Sustainable Growth A (PSGAX) seeks capital appreciation over the long term. The fund invests in small cap companies while maintaining the risk profile of the S&P 500 which consists entirely of large cap companies. The small-cap mutual fund returned 22.52% over the last one year period.

As of September 2011, this small-cap mutual fund held 28 issues, with 5.49% of its total assets invested in BlackRock Liquidity TempFund Instl.

DWS Small Cap Growth A (SSDAX) invests a large share of its assets in domestic 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 11.16% over the last one year period.

The fund manager is Rafaelina Lee 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.

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