Top Small-Cap Funds for Growth Amidst Market Slowdown

Even though the broader small-cap market has slowed down, some individual small-cap mutual funds are still delivering impressive returns. If you’re looking to invest, understanding which funds stand out can really help your long-term growth.

Small-Cap Market: A Closer Look

The Nifty Smallcap 250 TRI only returned 0.64% over the last year, a big change from the 20% annual growth it saw for three years straight. Despite this, only 5 out of 31 small-cap schemes with a one-year history actually lost money, showing resilience. In fact, a significant 55% of Systematic Investment Plan (SIP) funds are now flowing into this segment, highlighting strong investor interest.

Key Small-Cap Market Numbers

• Nifty Smallcap 250 TRI one-year return: 0.64%
• Small-cap schemes with losses (out of 31): 5
• SIP funds directed to small-caps: 55%

How We Identified Top Funds

To find the best options, a detailed quantitative analysis looked at 6-month, 1-year, 3-year, and 5-year rolling returns. It also considered important risk-reward metrics like standard deviation, Sharpe ratio, Sortino ratio, and up/down capture ratio. This thorough approach helps identify funds that perform well consistently while managing risk effectively.

Spotlight: Bandhan Small Cap Fund

The Bandhan Small Cap Fund has shown remarkable growth, outperforming its category significantly. Over three-year rolling periods, it returned 30.48%, compared to the benchmark’s 20.32%. It also boasts strong five-year returns of 26.09%.

With a Sharpe ratio of 0.32 and a Sortino ratio of 0.63, it demonstrates good risk-adjusted returns. However, its substantial assets under management (AUM) of around Rs 311 billion could present a challenge in finding truly small companies to invest in.

Spotlight: Invesco India Smallcap Fund

The Invesco India Smallcap Fund stands out for its consistent performance, beating the benchmark across all measured periods: one, three, five, and seven years. Its outperformance margins ranged from 4.35 to 6.74 percentage points, suggesting a reliable strategy. This fund also features the lowest standard deviation among the three at 18.75, indicating less volatility.

For those looking at direct plans, its expense ratio is competitively low at about 0.39%, which can make a difference in your long-term returns.

Spotlight: Union Small Cap Fund

The Union Small Cap Fund has seen a strong recovery recently, achieving the second-highest one-year rolling return in its category at 9.94%. This significantly beat the benchmark by 9.3 percentage points. With a smaller AUM of around Rs 22.7 billion, it has a structural advantage in investing in truly small companies.

While its three-year performance lagged the benchmark, it delivered better results over five and seven years. Its recent strong showing is linked to a new management team that took over in late 2024.

Important Considerations Before Investing

Remember, in a market where two-thirds of active funds couldn’t beat their index over three years, choosing the right fund is more important than just picking the small-cap category. Small-cap investments are known for their volatility, meaning prices can swing quite a bit.

• Consider a minimum investment horizon of seven years, with ten years being even better.
• Evaluate the scheme’s investment mandate to ensure it aligns with your goals.
• Look into the fund manager’s track record and their experience.
• Understand the costs involved, including expense ratios.
• Review the fund’s portfolio composition to see what types of companies it invests in.
• Always assess your personal risk tolerance—how comfortable you are with potential ups and downs.

By carefully researching and understanding these factors, you can make informed decisions about whether small-cap funds fit into your long-term financial strategy, even when the market environment is challenging.