Yes, small cap mutual funds can give good returns in the long term. But, it is always advised to keep your portfolio diversified to balance the market volatility.
Small Cap Funds are those which invest in all companies except the top 250 in terms of market capitalization. These are the companies whose market capitalization is less than Rs 5000 crores.
If we look at the history of returns of small cap funds for 5 Yrs, the returns range between 13% to 23% and sometimes even more. It is true that long term investment in mutual funds can beat volatility. But, in case of small cap funds, it is high risk-high return.
So, instead of investing all your money in small cap funds only, go for diversification. Include some large cap funds and some multi cap funds also.