A small-cap value fund is a good choice for investors seeking diversification across sectors and companies and focusing on gaining exposure to stocks that are trading at a discount. Those with a high-risk appetite should invest in these funds. Small-cap funds generally invest in companies having a market cap of less than $2 billion. The companies, smaller in size, offer growth potential and can subsequently see an increase in market capitalization.

Meanwhile, value stocks are those that tend to trade at a price lower than their fundamentals (i.e. earnings, book value, debt-equity). It is a common practice to invest in value funds for income or yield. However, not all value funds solely comprise companies that primarily use their earnings to pay out dividends. Investors interested in picking value funds for yield should check the mutual fund yield, which is the total dividend payout divided by the value of the mutual fund’s shares.

Below we share with you three top-ranked, small-cap value mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform its peers in the future. 

Bridgeway Omni Small-Cap Value N (BOSVX - Free Report) invests a huge part of its assets in equity securities, including common stocks of small-cap companies. BOSVX normally invests in small-cap companies, which are listed on the NASDAQ, the NYSE MKT and the New York Stock Exchange. Bridgeway Omni Small-Cap Value N has one-year annualized returns of 17.6%.

BOSVX has an expense ratio of 0.60% compared with the category average of 1.32%.

DFA Tax-Managed US Targeted Value (DTMVX - Free Report) seeks appreciation of capital and aims to minimize federal taxes charged on returns. It normally invests a chunk of its assets in securities of domestic mid and small-cap companies that are expected to be value stocks. DFA Tax-Managed US Targeted Value returned 14.6% in the past year.

As of June 2018, DTMVX held 1,503 issues, with 0.66% of its assets invested in Assurant Inc.

Prudential QMA Small-Cap Value A (TSVAX - Free Report) invests a majority of its assets in equity securities of small-cap companies whose market-cap falls within the range of the Standard & Poor's SmallCap 600 Index or the Russell 2000 Index. The fund may also invest around one-fourth of its assets in real estate investment trusts. Prudential QMA Small-Cap Value A has one-year annualized returns of 11.3%.

Stephen Courtney is one of the fund managers of TSVAX since 2015.