The small-cap segment in India is no longer in the phase it was a year ago.
What was once a broad-based rally driven by liquidity and expanding valuations has transitioned into a far more selective and uneven market.
In this environment, the way a small-cap mutual fund is constructed becomes as important as the returns it has delivered.
In this editorial, we will cover Bandhan Small Cap Fund…
Since its launch on 25 February 2020, the fund has been part of a full market cycle entering at a time of disruption, participating in a strong recovery, and now navigating a phase where the market is beginning to differentiate more sharply between companies.
This makes it relevant to examine not just outcomes, but the underlying approach that shapes them.
Understanding the current smallcap environment
The behaviour of small-cap stocks has changed in recent months.
The earlier phase was characterised by widespread participation capital flowed into the segment, and a large number of stocks moved up together. That phase tends to compress risk perception, as rising prices create a sense of uniform opportunity.
What is visible now is different.
Price movements have become more dispersed. Some stocks continue to hold ground or recover, while others struggle to regain earlier levels. This divergence is typically a sign that the market is beginning to reassess assumptions around growth and sustainability.
In practical terms, the shift is from valuation expansion to earnings validation. Companies are no longer being rewarded simply for being part of a high-growth segment; they are increasingly being judged on execution.
This backdrop has direct implications for how a small-cap fund is expected to behave.
Portfolio structure: Managing uncertainty through breadth
Within this environment, Bandhan Small Cap Fund’s portfolio construction stands out for its emphasis on spread rather than concentration. The scheme currently has an AUM of Rs 202.91 bn.
Instead of building the portfolio around a limited number of high-conviction ideas, the fund allocates capital across a wider set of companies.
This has two effects:
- It reduces dependence on any single outcome
- Allows participation across different pockets of the market, which becomes relevant when leadership is not clearly defined.
Such an approach may not always lead to sharp outperformance in momentum-driven markets. However, when the market becomes fragmented, it could help in maintaining balance.
Sector Allocation
Source: ACE MF
Sector exposure follows a similar pattern. The fund does not appear to be anchored to one dominant theme. The fund holds highest allocation of 27.6% to Financial Services, 11.4% in Healthcare and 10.2% in Capital goods.
Instead, it carries positions across areas linked to domestic growth, financial intermediation, and industrial activity. This suggests an attempt to capture multiple drivers rather than rely on a single macro narrative.
Stock selection: Looking beyond consensus comfort
Small-cap investing often involves identifying businesses before they become widely tracked. This requires a willingness to move away from consensus positioning.
The portfolio reflects a mix of companies at different stages of their business cycles. Some are linked to improving operating conditions, while others appear positioned to benefit from gradual shifts in demand or capacity utilisation.
The common thread is not uniformity, but the expectation of progression.
Source: AMFI – Bandhan Small Cap Fund Factsheet
As you could see, the scheme holds highest allocation in REC Ltd. at 3.57% – a government-backed NBFC focused on financing power sector infrastructure, it plays a key role in funding generation, transmission, and renewable energy projects across India.
Sobha Ltd at 3.25% is a real estate developer known for its presence in premium residential and contractual projects.
LT Foods Ltd at 2.27% is a branded food company with a strong global presence, it focuses on value-added agri-products and international distribution.
At the same time, position sizing remains measured. This indicates that conviction is expressed through participation rather than concentration. In a segment where outcomes may change quickly, such an approach helps in avoiding disproportionate exposure to individual stocks.
Liquidity, both at the market level and within individual stocks, has become more relevant than it appeared during the rally phase.
Bandhan Small Cap Fund’s use of cash or near-cash allocation (13.06%) could be viewed through this lens. It introduces an element of flexibility. Rather than remaining fully deployed at all times, the fund retains the capacity to respond to changes in market conditions.
Performance: Interpreting outcomes in context
Performance in the small-cap category needs to be interpreted with an understanding of the underlying cycle.
The recent years have been supportive for the segment, with improving earnings and strong investor participation. Funds aligned with these trends have naturally reflected that in their return profile.
However, the current phase introduces a different set of expectations. Returns are likely to be more differentiated, and the gap between companies with consistent earnings delivery and those without may widen further.
In such an environment, the sustainability of performance becomes more relevant than its magnitude.
| Scheme Name | Absolute (%) | CAGR (%) | Risk Ratios | |||
| 1 Year | 3 Years | 5 Years | Sharpe | Sortino | SD Annualised | |
| Bandhan Small Cap Fund | 8.03 | 31.88 | 31.74 | 0.36 | 0.70 | 18.51 |
| Category Average | 2.73 | 21.81 | 28.18 | 0.10 | 0.21 | 17.30 |
| Benchmark – BSE 250 Small Cap – TRI | 0.06 | 0.41 | 0.82 | 0.32 | 0.56 | 19.69 |
Source: ACE MF
The portfolio’s valuation multiple, with a PE of 27.39, reflects its tilt towards growth-oriented businesses within the small-cap segment, where earnings scalability often commands relatively higher valuations.
The portfolio turnover ratio of 22% remains moderate, indicating a preference for holding positions through earnings cycles while allowing for selective rebalancing as opportunities evolve.
Volatility, reflected in a standard deviation of 18.51, remains structurally higher, which is characteristic of the small-cap segment rather than a function of portfolio-specific positioning.
Risk-adjusted metrics such as a Sortino ratio of 0.7 and Sharpe ratio of 0.36 provide insight into return efficiency, particularly in a market environment where dispersion across stocks has increased.
The fund’s longer-term CAGR of 31.74% highlights its participation in favourable phases of the market cycle, alongside the inherent fluctuations associated with small-cap investing.
Risk: Shifting from broad to specific
Risk in small-cap funds is often associated with volatility, but the nature of that volatility is evolving.
Earlier, market-wide movements tended to dominate outcomes. Now, risk is increasingly linked to company-specific factors like balance sheet quality, execution capability, and resilience to changing demand conditions.
For a diversified portfolio, this shift can lead to a different experience. Instead of uniform drawdowns, the impact may be distributed across positions. However, the overall risk level of the category remains elevated.
It is also important to recognise that liquidity risk does not disappear. In periods of stress, smaller companies can still experience sharp price movements due to limited participation.
About Fund Managers
Bandhan Small Cap Fund is managed by an equity team led by Manish Gunwani, along with Kirthi Jain, who collectively oversee portfolio construction and stock selection in the small-cap universe.
Manish Gunwani, Head of Equities at Bandhan AMC, brings over two decades of experience in equity markets and plays a central role in defining the fund’s investment framework.
His approach combines a top-down understanding of sectoral trends with bottom-up stock selection, which is relevant in the small-cap space where identifying scalable businesses early is critical.
Kirthi Jain focuses on equity research, with an emphasis on tracking opportunities within mid- and small-cap companies.
Her role involves evaluating business models, earnings visibility, and sector dynamics, contributing to idea generation and portfolio positioning in line with the fund’s growth-oriented strategy.
The fund management approach reflects a research-intensive process, where stock selection is driven by fundamental analysis while maintaining diversification and liquidity awareness—both of which are critical in managing a portfolio within the small-cap segment.
Positioning in the current cycle
The present phase of the small-cap market is neither a broad rally nor a deep correction. It sits somewhere in between a period of adjustment where excesses are being absorbed and opportunities are becoming more selective.
In such a setting, the focus shifts from capturing momentum to managing participation.
Bandhan Small Cap Fund’s structure appears aligned with this requirement. Its diversified approach, measured allocation, and liquidity awareness suggest a framework designed to navigate uncertainty rather than maximise short-term gains.
At the same time, it remains fully exposed to the underlying characteristics of the segment. Market direction, earnings trends, and investor sentiment will continue to influence outcomes.
Final thoughts
Small-cap investing does not follow a linear path. Phases of expansion are often followed by periods of consolidation, and each stage demands a different approach.
Bandhan Small Cap Fund provides an example of how a portfolio could be structured to operate across these phases. Its emphasis on breadth, selectivity, and flexibility reflects an understanding that the segment’s risks and opportunities are closely intertwined.
As the market moves into a more discerning phase, the ability to balance participation with discipline may become increasingly important in shaping long-term outcomes.
Table Note: Data as of April 16, 2026
The securities quoted are for illustration only and are not recommendatory
Past performance is not an indicator for future returns.
Returns are on rolling CAGR basis and in %. Direct Plan-Growth option.
Those depicted over 1-Yr are compounded annualised.
Risk ratios are calculated over a 3-year period assuming a risk-free rate of 6% p.a.
Invest wisely.
Happy investing.
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