Top 3 Small Cap Funds in India 

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I'm Mitali Dhoke (Sr. Research Analyst), here to simplify mutual fund investing and guide you on a smarter wealth creation journey!

Every big company was once a small cap - and that's exactly why this space excites long-term investors.

But are small-cap mutual funds still worth investing in after the recent market correction?

India's small-cap space, once the star performer of the equity markets, is now facing some serious heat going through a period of stretched valuations.

Following a spectacular rally in 2023 and early 2024, the space is now indicating a slowdown.

Nifty Small Cap 250 Index, which registered significant returns in the past year has now become volatile. The Index witnessed a sharp rally between April and September 2024, peaking around 23,416. But what followed was a steady slump, with the index plunging to a low of 17,405 by March 2025 - wiping out a significant portion of the previous gains.

This nearly 26% correction reflects how brutal the recent volatility has been for small-cap investors.

As the market shifts gears in 2025, rising volatility and broad-based corrections have started to spook investors.

In spite of the recent downturn, the long-term structural story for small caps remains intact.

However, 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.

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.

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