Small cap mutual funds have been among the most sought-after subcategories of equity mutual funds. The return-generating potential demonstrated by these funds has drawn investors to them.
From late 2021 through 2025, small-cap funds have reported remarkable inflows, being among the significant contributors. The AUM of small-cap funds is nearly Rs 3.57 trillion (tn) as per September 2025 data released by AMFI.
However, of late, considering the valuations in smallcaps, investors have turned cautious – and wisely so – as valuations look stretched in the market cap segment. The trailing PE of the Nifty Smallcap 250 index is at 31, slightly higher than the 5-year average of 29.
Small cap mutual funds are mandated to invest at least 65% of their total assets in small cap companies. These are beyond the 251st company on a full market capitalisation basis, which are in their growth stage, but the risk of investing is very high.
For this reason, they are placed at the higher end of the risk-return spectrum of equity funds.
If you are considering this subcategory of equity mutual funds, what you need to do is keep an investment horizon of at least 7-8 years, be ready to assume very high risk, and sensibly choose schemes that have rewarded investors on a risk-adjusted basis.
You can’t simply be going by any small cap fund out there in the endeavour to earn good returns. A thoughtful approach needs to be followed.
In this editorial, we will take you through 3 small-cap mutual funds that have performed well on longer-period rolling returns and risk-return metrics such as standard deviation, sharpe ratio, and sortino ratio.
In short, these funds have fared optimally on a risk-adjusted basis by keeping risks in check.
#1 Bandhan Small Cap Fund
Launched in February 2020 during the COVID-19 pandemic, this fund has seen its AUM grow over the years, particularly since October 2023.
As per the September 2025 portfolio, Bandhan Small Cap Fund boasts an AUM of over Rs 157 billion (bn), which has come on the back of its impressive long-term performance.
The fund focuses on identifying high-growth potential companies in the early stages of their business lifecycle, aiming to capture opportunities before they mature into mid or large-cap leaders.
It follows a 3-pronged strategy focusing on quality, growth, and reasonable valuations when investing in smallcaps. The stock selection strategy is based on the GARP (Growth At Reasonable Price) approach.
It looks for businesses whose market share is gaining, there is significant room for scalability, and which are backed by passionate managements. It avoids businesses that are overleveraged.
Among the parameters, it views healthy return on invested capital, profitability, cash flows, along with reasonable valuations with rerating potential.
The fund typically holds a large portfolio of 180-200 stocks. As of September 2025, it has 222 stocks, of which 69% are smallcaps, 10% are midcaps, and 9% are largecaps.
The top 10 stocks are 18.5% of the portfolio and include names such as Sobha (3.4%), REC (2.4%), LT Foods (2.1%), etc.
Among the various sectors, the top 3 are finance (12.3%), healthcare (11.1%), and realty (8.3%), comprising 31.7% of its total assets.
The fund is currently holding cash & cash equivalents around 10% of its assets. It follows a buy-and-hold approach, but at times, it hasn’t resisted churning its portfolio to achieve its investment goal of long-term capital appreciation. The portfolio turnover has ranged from 28-69% in the last one year.
The strategy followed by the fund has rewarded investors decently. The compounded annualised rolling returns over 3 years and 5 years are 30.4% and 36%, respectively, as of 3 November 2025. These returns are higher than the category average and the Nifty Smallcap 250 – TRI.
That said, the fund has exposed its investors to higher risk (standard deviation of 17.56), yet less than the Nifty Smallcap 250 – TRI.
Nonetheless, the risk-adjusted returns clocked by the fund are quite appealing, as reflected by the sharpe and sortino ratios of 0.42 and 0.84, respectively. In other words, the fund has justified the risk taken with appealing returns.
In fact, on the sortino ratio – which captures the downside risk while speaking about risk-adjusted returns – the fund has fared better than the category average and the Nifty Smallcap 250 – TRI.
#2 Invesco India Small Cap Fund
Launched in October 2018 during a meltdown phase for smallcaps, this fund has shown appealing performance in the ensuing bull phase, particularly in the last five years. As a result, the AUM of the fund has grown, and as per the September 2025 portfolio, it is over Rs 80 bn.
The fund holds a hold a diversified portfolio of around 65-80 smallcap companies selected based on a bottom-up investment approach.
For stock selection, it uses a proprietary stock categorisation framework. The parameters include the following, among others:
- Revenue growth
- EBITDA margin or PAT margin
- Operating leverage
- Return on Equity (ROE) and its expansion
- Profit leverage
- The net worth of the company
- Valuations of assets or businesses
At times, in line with the investment objective, the fund also invests in various derivative instruments (for hedging and non-hedging purposes).
As per the September 2025 portfolio, the fund has 68 stocks in its portfolio, of which smallcaps are 63%, midcaps 25%, and largecaps 7%.
The top 10 stocks comprise 32.2% of the fund’s portfolio and include names such as Sai Life Sciences (5.3%), Krishna Institute of Medical Sciences (4.2%), Swiggy (3.5%), etc.
Among a wide range of sectors, the top 3 are healthcare (19.1%), finance (17.9%), and retail (9.4%).
The fund is almost fully invested, as cash & cash equivalents are about 1.7% of its assets.
In the last one year, the fund’s portfolio turnover ratio has ranged between 30-52%, which reflects that, by-and-large, the fund approaches stocks with a long-term view.
The fund endeavours to optimise portfolio turnover to maximise gains and minimise risks, keeping in mind the cost associated with it.
This has helped Invesco India Small Cap Fund to clock appealing compounded annualised rolling returns of 26.8% and 33.2% over 3 years and 5 years, respectively, outperforming the category average and the Nifty Smallcap 250 – TRI by a reasonable margin (as of 3 November 2025).
The fund has exposed its investors to higher risk (standard deviation of 16.76) than the category average, but still less than that of the benchmark index. On a risk-adjusted basis (sharpe and sortino ratios of 0.36 and 0.67, respectively), it has rewarded investors well.
#3 Tata Small Cap Fund
Launched in November 2018, this fund has exhibited a noteworthy track record over the long term and outpaced many of its category peers. This has resulted in the fund’s AUM to grow over the years, and as of September 2025, it is over Rs 116 bn.
The fund aims to invest in stocks of companies that are in growth mode and have the potential to make it big in the market. It identifies growth-oriented sound stocks available at reasonable valuations. The emphasis is on stocks that carry low debt and high cash flow.
The focus is on buying businesses that can grow in terms of profitability and cash flows with strong balance sheets, where businesses can surprise the markets over a period of time in terms of delivery of earnings, which, in turn, can lead to a rerating of valuations.
Overall, a bottom-up approach is followed for its stock picking, wherein valuations and fundamentals are considered.
The fund always maintains a well-diversified portfolio of around 50-60 stocks and holds them over the medium to long term to derive its full potential.
As per the September 2025 portfolio, the fund has 61 stocks, of which 80% are smallcaps, 7% midcaps, and 13% others.
The top 10 stocks make up for 32.5% of the fund’s portfolio and include names such as Sudarshan Chemicals (5.4%), Usha Martin (4.3%), IDFC First Bank (3.5%), etc.
The top 3 sectors are chemicals (15.3%), capital goods (7.9%) and healthcare (7.5%), constituting 30.7% of the portfolio.
At present, the fund is holding nearly 12% of its assets in cash & cash equivalents.
Tata Small Cap Fund avoids chasing momentum bets and focuses on investing with a long-term view. Its portfolio turnover has ranged between 10-20% in the last one year.
The fund efficiently limited the downside risk during the market crash of 2020, while it also found a place among the top performers in the category in the recent bull phase.
The compounded annualised rolling returns delivered are respectable 24.6% and 33.8% over 3 years and 5 years, respectively, higher than the category average and Nifty Smallcap 250 – TRI.
What’s important is that while generating such returns, the fund has been able to keep its risk in check with a standard deviation of 15.93, which is lower than the category average and the benchmark index.
Thus, on risk-adjusted returns as well (as denoted by the sharpe and sortino ratios of 0.30 and 0.54, respectively, the fund has been an above-average performer.
Performance of the 3 Best Small Cap Mutual Funds
Rolling period returns are calculated using the Direct Plan-Growth option. Returns over 1 year are compounded annualised.
Standard Deviation indicates the risk, while the sharpe ratio and sortino ratios measure the Risk-Adjusted Return. They are calculated over 3 years, assuming a risk-free rate of 6% p.a.
*All small cap funds are considered for category average purposes.
Please note that returns here are historical returns.
Past performance is not an indicator of future returns.
The securities quoted are for illustration only and are not recommendatory.
Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
Source: ACE MF
What You Should Know
Smallcaps carry a very high risk. Not all smallcaps have become multibaggers. It is important that fund managers of small-cap funds are able to identify those with growth potential.
Also, like any other market cap segment, smallcaps move in cycles. A period of strong growth may be followed by a correction and vice versa. Hence, do not lay much emphasis on past returns, which may or may not repeat in the future.
In volatile times such as at present, taking the SIP route may prove beneficial as opposed to making a lump sum investment. SIPs with an inherent rupee-cost averaging feature may help mitigate risks.
Be a thoughtful investor.
Happy investing.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here…
The website managers, its employee(s), and contributors/writers/authors of articles have or may have an outstanding buy or sell position or holding in the securities, options on securities or other related investments of issuers and/or companies discussed therein. The content of the articles and the interpretation of data are solely the personal views of the contributors/ writers/authors. Investors must make their own investment decisions based on their specific objectives, resources and only after consulting such independent advisors as may be necessary.
