As a category, small-cap funds have gotten hordes of investors interested with assets swelling substantially. The category commands ₹3.73 trillion in assets under management as of October 2025.

And to be fair, a good many of the funds in the category have repaid investor faith with robust returns over the past decade or so.

While the markets are slowly regaining their pre-September 2024 buoyancy, valuations are still uncomfortable in the broader markets. At over 30 times price earnings as of October 2025, the Nifty Small Cap 250 TRI is more expensive than the Nifty 100 TRI (at around 22 times). But given that many stocks in the space still languish at 40-60 per cent lower levels than their highs, there may be pockets of comfort emerging.

For investors in active small-cap funds, the bar needs to be high. A fund should beat the small-cap benchmark convincingly for the risk taken on a rolling return basis over the medium to long term. Even if the individual scheme’s performance is strong on a standalone basis (say a fund with 20 per cent plus returns on five-year rolling basis), it is not sufficient enough to stick to it given that peers have done a lot better and outperformed the benchmark.

In this exercise, we seek to identify a few small-cap funds that have struggled to beat the benchmark and deliver well, so that your portfolio can be realigned to the stronger schemes in the space.

Creditable performance

We divided the small-cap fund universe into two broad categories. Those with a track record of 10 years or more and schemes with five-plus years of operations.

For the first group, we have considered 5-year rolling returns over the past 10-year timeframe of November 2015 to November 2025.

In the case of funds with five-year plus track records, we have considered 3-year rolling returns over November 2020 to November 2025.

For both cases the corresponding rolling returns for the Nifty Small Cap 250 TRI are reviewed.

Now, among the 13 funds with a 10-years-plus track record, only two schemes have delivered a lower mean return than the Nifty Small Cap 250 TRI.

The same has been the case with seven funds having more than 5 years of operations, as only two schemes underperformed the benchmark.

You can exit the schemes that have lagged the benchmark and peers over the years.

Common diversification threads

The one key aspect to note across small-cap fund universe has been the sheer diversification in terms of holdings to the point of having highly diffused holdings on individual stocks.

So, the best of the lot Nippon India Small Cap has well over 200 stocks in its portfolio. Axis Small Cap and ICICI Prudential Small Cap hold 141 and 104 companies, respectively, going by their recent October portfolios.

Across the spectrum of funds, even with those holding less than 100 stocks, the top 10 holdings rarely crossed even 25 per cent. And the proportion of the subsequent companies in the portfolio has been thin.

Another key aspect has been the addition of large-cap and mid-cap stocks in the portfolio. Small-cap funds are mandated to invest at least 65 per cent of their holdings in small-cap stocks and are free to allocate to other segments with the rest of their portfolio. So, many funds loaded up in large-cap and midcap stocks.

Quant Small Cap, for example, has Reliance Industries and Jio Financial among its top constituents.

Finally, holding cash positions, sometimes in double-digit percentages during volatile and troubled market spaces, has been witnessed among some schemes.

For those that lagged, not going for growth segments (especially as small-caps are usually growth driven) and focusing excessively on value picks, wrong sector calls and holding less cash caused their lackadaisical performance.

What should investors do?

In the small-cap category, investors must not go too deep with several funds. A couple of funds at the most would suffice for investors with a reasonable risk appetite.

So, a Nippon India Small Cap (from the older schemes) and Bandhan Small Cap from the newer pack can be suitable additions to your portfolio via the SIP route.

We are presently avoiding commentary on Quant Small Cap, though its long-term record is spectacular.

Although the overall performance record of small-cap funds has been strong, it must be noted that some of these schemes derive their overall record on rolling returns outperformance to their showing in the pre-Covid period. And these have had relatively weak performances in recent years. For example, HSBC Small Cap, DSP Small Cap, Kotak Small Cap and SBI Small Cap haven’t had a great run on a trailing basis over the past 2-3 years. If you have SIPs running in these schemes, you can consider moving the instalments to the two funds mentioned earlier. However, you can continue to hold the existing accumulated investments, but should wait for improvement in performance before committing fresh amounts.

Published on November 29, 2025