Small-cap mutual funds have staged a sharp comeback over the past month, delivering double-digit returns of around 10% and outperforming both mid-cap and large-cap peers. The rebound follows a phase of correction and has revived investor interest in the segment, even as debate continues over whether the rally marks the start of a sustained upcycle or merely a short-term recovery.

Latest portfolio disclosures from 16 tracked small-cap funds for March 2026 offer a clearer view of how fund managers are positioning amid this rebound. The data points to a well-diversified allocation strategy, with no excessive concentration in any single theme or sector.

Top holdings

Aster DM Healthcare Ltd emerges as the most widely held stock by value, with cumulative exposure of ₹3,576 crore across funds. Banking stocks feature prominently, including City Union Bank Ltd (₹2,976 crore) and Karur Vysya Bank Ltd (₹2,832 crore), underlining continued confidence in select lenders.

Healthcare remains a core allocation theme, with Krishna Institute of Medical Sciences Ltd (₹2,969 crore) ranking among the top holdings. Interestingly, Reliance Industries Ltd (₹2,918 crore)—a large-cap—also finds a place in small-cap portfolios, indicating tactical flexibility within fund mandates.

Other key holdings include Multi Commodity Exchange of India Ltd (₹2,735 crore), Apar Industries Ltd (₹2,383 crore), RBL Bank Ltd (₹2,288 crore), Navin Fluorine International Ltd (₹2,066 crore), and Kalpataru Projects International Ltd (₹2,013 crore). The mix spans capital market infrastructure, specialty chemicals, and EPC, reflecting broad-based sector exposure.

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Broad coverage

A defining feature of these portfolios is their low concentration risk. The top five holdings account for just 5.9% of total equity exposure, while the top ten contribute 10.3%. This indicates a deliberate effort by fund managers to diversify across a wide universe to mitigate volatility.

In total, the dataset spans 718 stocks across 16 funds, with only 11 common core holdings. This reinforces the bottom-up stock selection approach typically associated with small-cap investing, where alpha generation depends on identifying emerging businesses rather than relying on a handful of dominant names.

What's paying off

Sectoral allocation trends further highlight a pro-cyclical bias. Banks lead with cumulative exposure of ₹20,382 crore, followed closely by industrial products (₹20,066 crore) and auto components (₹19,855 crore). This positioning suggests fund managers are aligning portfolios with domestic growth and capex-driven themes.

Consumption and defensive sectors also feature meaningfully. Consumer durables (₹17,163 crore) and pharmaceuticals (₹16,356 crore) provide balance, while financial services, healthcare services, and chemicals add further diversification.

Additional exposure is spread across electrical equipment (₹9,959 crore), capital markets (₹9,884 crore), construction (₹7,911 crore), and retailing (₹6,969 crore), underscoring the breadth of opportunity within the small-cap universe.

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Sustainability of rally

Despite the strong recent performance, sustainability remains uncertain. The diversified portfolio structure suggests fund managers are not chasing momentum aggressively, instead maintaining balanced exposure across cyclical, defensive, and structural growth segments.

Market participants broadly attribute the rally to improved liquidity conditions, resilient SIP inflows, and a revival in risk appetite following earlier corrections. Stable earnings expectations have also supported sentiment.

However, caution persists. Analysts warn that sharp upmoves in small caps are often sentiment-led and can reverse quickly if liquidity tightens or valuations overshoot fundamentals. For investors, the key risk lies in performance-chasing— allocating capital based on recent returns rather than long-term suitability.

In that context, while the current rebound highlights the return potential of small caps, it also reinforces the importance of disciplined allocation, diversification, and alignment with risk tolerance in navigating this inherently volatile segment.