over time. Small cap funds also enjoy high levels of demand when markets are booming, which leads to significant increases in their prices. Investors looking for better diversification could also 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.

Legg Mason ClearBridge Small Cap Growth A (NASDAQ:SASMX - News) seeks long-term capital appreciation. The fund invests the majority of its assets in small-cap companies. It focuses on acquiring common stocks of domestic firms. This small-cap mutual fund has a three year annualized return of 22.68%.

The small-cap mutual fund has a minimum initial investment of $1,000 and an expense ratio of 1.36% compared to a category average of 1.48%.

Conestoga Small Cap (CCASX) invests heavily in small cap companies. The fund focuses on acquiring equity securities, including ADRs, convertible securities and preferred stocks. Under normal circumstances, not more than 20% of its assets may be utilized to purchase foreign securities. The small-cap mutual fund returned 14.99% over the last one year period.

The fund manager is William C. Martindale, Jr. and he has managed this small-cap mutual fund since 2002.

James Small Cap (NASDAQ:JASCX - News) seeks capital appreciation over the long term. The fund invests the majority of its assets in common stocks of small cap firms. Companies invested in must have market capitalizations lower than stocks included in the Russell 2000 Index. This small-cap mutual fund has a ten year annualized return of 9.25%.

As of July 2011, this small-cap mutual fund held 120 issues, with 4.92% of its total assets invested in Polaris Industries, Inc.

Virtus Quality Small-Cap A (NASDAQ:PQSAX - News) invests heavily in small-cap companies. The fund invests in common stocks of a limited number of companies that are attractively priced relative to their underlying value. Its portfolio consists of 25-30 securities at any given point in time. This small-cap mutual fund returned 14.37% over the last one year period.

The small-cap mutual fund has a minimum initial investment of $2,500 and an expense ratio of 1.48% compared to a category average of 1.36%.

DWS Small Cap Growth A (NASDAQ:SSDAX - News) seeks capital growth over the long term. The fund 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. This small-cap mutual fund has a three year annualized return of 25.57%.

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, 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.

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