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 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. 

Prudential QMA Small-Cap Value A (TSVAX - Free Report) invests a bulk 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 three-year annualized returns of 9.6%.

As of May 2018, TSVAX held 302 issues, with 1.15% of its assets invested in American Equity Investment Life Holding Co.

Bridgeway Small-Cap Value (BRSVX - Free Report)  maintains a diversified portfolio of securities from small-cap companies listed on the NYSE, NYSE MKT, and Nasdaq. BRSVX seeks total returns mainly through growth of capital. The fund invests a bulk of its assets in undervalued small-cap stocks. Bridgeway Small-Cap Value has three-year annualized returns of 10.4%.

BRSVX has an expense ratio of 0.94% compared with the category average of 1.2.5%.

DFA US Targeted Value R1 (DFTVX - Free Report) seeks capital growth for the long run. DFTVX maintains a diversified portfolio by investing in domestic small- and mid-cap companies that the fund’s Advisor considers to be value stocks. DFA US Targeted Value R1 has three-year annualized returns of 9.1%.

Jed Fogdall is one of the fund managers of DFTVX since 2012.