India’s small cap space is presently going through a period of stretched valuations.
Following a spectacular rally in 2023 and 2024, the space is now indicating a slowdown.
After a relatively calm beginning to 2025, the Indian equity market saw increased volatility with sharp, across-the-board declines spooking investors. Small-cap stocks, which were on a strong bull run for close to five years, were badly affected.
Nifty Small Cap 250 Index, which registered significant returns in 2024, has become volatile.
Performance Trend of Nifty Smallcap 250 TRI
In spite of the recent downturn, the long-term structural story for small caps remains intact.
But regulatory concern about stretched valuations and a crowded trade in high-quality small-cap stocks has caused fund managers to change strategy—from active accumulation to selective, valuation-driven investment.
At this juncture, investors should embrace a methodical long-term strategy.
All Small Cap Funds are not worth risking your money on. Diligent comparisons are required to gain maximum benefit from this high-risk, high-reward category.
Here are the top 3 Small Cap Funds that have performed well in terms of consistency, risk-adjusted returns, and portfolio quality.
#1 Nippon India Small Cap Fund
Launched in September 2010, Nippon India Small Cap Fund is among the oldest, best-known, and high-performing small cap funds. It has an AUM of Rs 580.28 billion (bn).
This fund has attracted considerable investor attention with a strong long-term record and seasoned fund management. It focuses on taking advantage of the growth potential of under-covered and emerging businesses across sectors.
Its bottom up stock picking strategy, with a diversified portfolio of 100+ stocks, helps to minimise risk, in the volatile small cap universe.
During the past 3 to 5 years, the fund has produced spectacular returns, beating both its benchmark as well as category average consistently. The fund has been able to withstand market corrections and capture good upside in bull markets.
Nippon India Small Cap Fund’s largest holdings include a combination of large-cap, mid-cap, and small-cap shares. It has limited the allocation in each share to less than 2%.
The fund’s top stock holdings are HDFC Bank Ltd. (2.20%), Multi Commodity Exchange Of India Ltd. (1.95%), and Dixon Technologies (India) Ltd. (1.33%). The top three sectors are Capital Goods (11.98%), Healthcare (8.24%), and Chemicals (7.67%).
Looking ahead, this diversified portfolio, with large exposures to industrials, consumer cyclicals, and financial services, makes it poised to benefit from India’s growth.
Overall, Nippon India Small Cap Fund is a strong contender for wealth creation, if investors are willing to endure volatility and remain invested for 5–7 years.
#2 Bandhan Small Cap Fund
Bandhan Small Cap Fund seeks to build a well-diversified portfolio of small-cap equity with a prime focus on quality, growth, and valuations. The scheme was rolled out in February 2020 with a corpus of Rs 102.44 bn.
In a comparatively shorter time frame, the fund has gained momentum rapidly because of its impressive performance.
The fund’s top stock holdings are Sobha Ltd. (3.13%), LT Foods Ltd. (2.38%), and The South Indian Bank Ltd. (2.33%). The top three sectors are Finance (12.56%), Healthcare (12.07%), and Realty (8.08%).
Nippon India Small Cap Fund has posted impressive growth, more so during market bull phases, outpacing the benchmark alongside most of its notable peers in the segment.
The fund also scores high in risk-adjusted returns as indicated by its information ratio and up/down capture ratio which are currently among the best in the category.
Information Ratio indicates whether a fund outperforms its benchmark after risk adjustment, higher values indicate consistent outperformance.
Up/Down Capture Ratios inform you about how the fund behaves in rising and falling markets— higher up capture means better gains, while lower down capture means better protection in downturns.
It carries a large portfolio of more than 180 stocks across various sectors.
The diversified approach of the fund and its track record makes it an interesting choice for investors with a high-risk tolerance and a long-term investment horizon.
#3 HSBC Small Cap Fund
The erstwhile L&T Emerging Businesses Fund merged with HSBC Small Cap Fund in October 2022 when HSBC AMC took over L&T AMC.
It gained prominence for its robust performance during 2015-2017, which resulted in a significant jump in its AUM, currently at Rs 147.37 bn.
The fund’s top stock holdings are K.P.R. Mill Ltd. (2.38%), Neuland Laboratories Ltd. (2.13%), and Aditya Birla Real Estate Ltd. (2.08%). The top three sectors are Finance (11.38%), Healthcare (8.00%), and Capital Goods (7.6%).
HSBC Small Cap Fund has provided stunning returns in the long run, with a CAGR of 32.2% and 21.22% in the last 5 years and 10 years, respectively, and surpassing its category average as well as its benchmark.
With a Sharpe ratio of 0.28 and an up/down capture ratio of 1.14, the fund shows a fairly favourable risk-reward profile and excellent performance during market rallies.
Rather than pursuing market trends, it invests in under-researched stocks with sound fundamentals, good management, and the potential to emerge as tomorrow’s leaders.
The bottom-up approach assists the fund to remain centred on quality small caps. With seasoned fund managers at the helm, the fund has enjoyed steady growth.
Performance of Top 3 Small Cap Funds in India
Conclusion
As the small-cap segment moves from an era of exuberance to consolidation, quality and selectivity will count more than ever before.
The long-term prospects of small-cap stocks is encouraging, supported by structural trends in the economy and the growing role of emerging firms.
Yet, due to the natural volatility involved, small-cap funds are ideal for those who can bear short-term market turbulence and stay invested through market cycles.
In this evolving landscape, a balanced approach based on discipline, research, and grounded expectations is the way to go.
Happy Investing!
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