Small-cap mutual fund category continues to attract investor attention as long-term returns remain robust despite market volatility. Among the notable performers, Nippon India Small Cap Fund and Bandhan Small Cap Fund have emerged as strong contenders. While both funds follow different portfolio structures and risk approaches, they share one striking similarity: both have comfortably outperformed the NIFTY Smallcap 250 TRI across point-to-point returns, SIP performance and rolling return metrics.

Despite managing diversified portfolios of nearly 250 stocks each, both schemes have delivered benchmark-beating returns, highlighting how broad diversification does not necessarily dilute performance in the small-cap space.

Performance

Bandhan Small Cap has shown stronger point-to-point returns in recent periods. Over one year, the fund delivered 12.6%, compared with 6.6% for the benchmark. Its three-year CAGR stood at 32.6%, significantly ahead of the benchmark's 22.2%, while five-year returns came in at 25.2% versus 19.6%.

Nippon India Small Cap also outperformed, though with a relatively steadier profile. The fund generated 9% one-year returns, while its five-year CAGR stood at 24.2% compared with 19.6% for the benchmark. Over seven years, it delivered 23.9% versus 18.4% for the index.

Bandhan appears to have generated stronger alpha over shorter periods, while Nippon demonstrates longer-term consistency.

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SIP investors

Systematic investors in both funds have seen substantial gains.

Bandhan’s SIP returns stand out, generating 7.3% over one year, 17.5% over three years, and 22.1% over five years, sharply exceeding benchmark returns of 0.4%, 7.5%, and 14%, respectively.

Nippon India Small Cap showed similarly strong SIP outcomes. The fund delivered 24.7% seven-year SIP returns, comfortably ahead of the benchmark's 20.3%. Five-year SIP returns also reached 17.5%, compared with 14.4% for the index.

The data suggests both funds have rewarded disciplined SIP investors despite market cycles.

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Risk profile and portfolio construction

Bandhan appears more aggressive from a risk-adjusted perspective. Its Sharpe ratio of 1.02 significantly exceeds Nippon’s 0.69, while Bandhan’s alpha stood at 8.7% compared with Nippon's 1.4%.

However, Bandhan also carries higher volatility, with standard deviation at 19.3% versus 18% for Nippon.

Portfolio composition also differs. Bandhan allocates 66.7% to small caps and keeps 13.1% in cash and others, suggesting tactical flexibility. Nippon allocates a larger 68.3% directly to small caps with lower cash exposure at 4%.

Top holdings differ sharply as well. Nippon holds names such as MCX, HDFC Bank and Karur Vysya Bank, while Bandhan includes REC, Sobha and LT Foods.

Rolling returns

Rolling return analysis often provides a clearer picture than point-to-point returns because it captures performance across multiple market phases.

Bandhan's three-year rolling returns averaged 31.5%, compared with 17.3% for the benchmark, and beat the benchmark 71% of the time. More notably, its five-year rolling returns beat the benchmark 100% of the time.

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Nippon's numbers are equally striking. The fund outperformed the benchmark 99% of the time in three-year rolling periods and 100% of the time over five-year periods.

These figures suggest that both funds have delivered performance consistency rather than benefiting from isolated market rallies.

For investors, the comparison highlights an important takeaway: there is no single formula for success in small-cap investing. Both Nippon India Small Cap and Bandhan Small Cap have used diversified portfolios and distinct strategies to consistently outperform their benchmark.

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