Small-cap mutual fund rankings can change sharply from one year to the next, making it difficult for investors to identify schemes that can deliver consistent returns. A fund that ranks among the best performers for several years can slip to the bottom of the category, while a previous laggard can move to the top.
This makes past returns an unreliable basis for selecting a small-cap fund on their own. Investors also need to examine the fund manager’s experience, portfolio concentration, liquidity risks and performance across different market conditions.
Harshvardhan Roongta, CFP at Roongta Securities, explained in an interview with CNBC-TV18 how investors should evaluate small-cap funds, identify persistent underperformance and decide when to reconsider their investments.
Why does fund selection matter in the small-cap category?
Small-cap funds have a wider universe of stocks to choose from than large-cap and mid-cap funds. According to Roongta, large-cap funds have around 100 companies in their investment universe, while mid-cap funds have 150. Small-cap funds officially have 250 companies, with the universe potentially extending to quality micro-cap stocks.
This gives fund managers greater scope to differentiate their portfolios, but it also makes their stock-selection skills particularly important.
Investors should examine a fund manager’s experience in managing small-cap investments rather than assume that success in another category will translate into similar results.
“You cannot have a star fund manager who managed a large-cap fund in the past now handling a small-cap fund and believe that they will deliver the same results as they did with large caps,” Roongta said.
Investors should also look at a scheme’s assets under management (AUM), the number of stocks it holds and the proportion of its portfolio allocated to individual companies and sectors.
These factors become particularly important during a market correction. If a fund holds a large quantity of a small-cap stock and needs to sell it, the lack of liquidity could put pressure on the stock’s price.
Why past returns can be misleading
Small-cap fund rankings can change considerably as market conditions and investment styles shift. Roongta cited the changing performance of three schemes to illustrate why investors should not select funds simply because they have delivered strong returns in recent years.
Quant Small Cap Fund was among the top-quartile performers in 2021, 2022 and 2023 before falling to the bottom quartile in 2024.
Bandhan Small Cap Fund followed the opposite trajectory. It was in the bottom quartile in 2021 and 2022 but moved into the top quartile in 2023, 2024 and 2025.
Nippon India Small Cap Fund, meanwhile, remained in the top quartile for three consecutive years from 2021 to 2023 but did not maintain that position in 2024 and 2025.
The gap between the best- and worst-performing funds can also be significant. Roongta said the weakest performer in the small-cap category had delivered a five-year return of around 11%, compared with approximately 19% for the best performer.
These examples show why investors should look beyond recent rankings and examine whether a fund’s performance has been consistent across different periods and market conditions.
How can investors identify persistent underperformance?
A fund’s performance should be assessed against two reference points: its benchmark and the average return of its category.
For instance, if a scheme delivers a 5% return while its benchmark gains 10%, it has underperformed its benchmark. If the small-cap category average is 12%, the scheme has also lagged its peers.
Roongta recommended examining one-year, three-year and five-year returns, alongside rolling returns, to assess performance across different periods. Investors should also consider how a scheme has managed downside risk rather than focus only on its performance during rising markets.
A fund that consistently trails both its benchmark and category average across these periods warrants closer scrutiny.
“If your fund has underperformed across all three periods and against both benchmarks of comparison, it may be time to consider moving out,” Roongta said.
The distinction is between a temporary period of weakness and sustained underperformance across multiple time frames. Investors should assess the evidence across these periods before deciding whether to continue holding a scheme.
Should investors choose an aggressive or conservative small-cap fund?
The right investment approach also depends on an investor’s expectations and tolerance for risk.
Someone seeking aggressive growth may prefer a fund that takes a more aggressive approach to small-cap investing. An investor who wants exposure to the category but is uncomfortable with excessive risk may prefer a more conservative scheme.
Roongta cited ICICI Prudential Small Cap Fund as an example of a scheme with a relatively conservative approach. He said this could suit investors who want small-cap exposure without taking on excessive risk, although it may not meet the expectations of those seeking more aggressive returns.
The choice, therefore, should depend on whether the scheme’s investment style matches the investor’s objectives, rather than on its ranking alone.
What does Roongta suggest for Kotak and ICICI Prudential Small Cap funds?
Addressing the underperformance of Kotak Small Cap Fund and ICICI Prudential Small Cap Fund, Roongta said investors should assess the schemes on their individual performance rather than make decisions based solely on their rankings.
He said Kotak Small Cap Fund had not performed as well as expected and suggested that investors could consider stopping their systematic investment plans (SIPs) in the scheme for now.
For ICICI Prudential Small Cap Fund, he said investors could continue for the time being, citing uncertainty in the small-cap segment and the wider market. He considered its relatively conservative approach potentially more suitable in these conditions.
His views on the two schemes reflect different assessments of their performance and investment approach, rather than a blanket recommendation to exit underperforming small-cap funds.
For investors, the central consideration is whether a scheme’s performance, investment approach and ability to manage risk justify staying invested. Recent returns can be a starting point for evaluation, but they should not be the deciding factor.
Watch accompanying video for full conversation.
How to choose small-cap mutual funds and avoid chasing past returns