Nippon India Small Cap Fund: Does the Fund Deserve a Place in Your Portfolio?

How is Nippon India Small Cap Fund Managed?

Fund manager Samir Rachh has been at the helm since January 2017. In interviews, he has consistently articulated the same thesis: diversification is the fund's superpower in small caps.

By spreading assets across a large number of stocks, the fund can stay invested for longer, ride out volatility in individual names, and let the winners compound without being forced to exit.

This translates into a portfolio that looks unlike any other small cap fund in India.

The fund has a total of 247 stocks in its portfolio as of March 2026 and has held around 67 of it consistently for the past 3 years. The category average, by comparison, sits around 70-80 stocks in total.

Nippon India Small Cap Fund Report Card

So Nippon India Small Cap Fund holds more stocks than most peers hold in their entire portfolio.

But here is the nuance that matters: holding 240+ stocks does not mean the assets are spread evenly like peanut butter on toast.

The portfolio follows a core-and-tail structure. A concentrated set of high-conviction bets in the top two quartiles drives the fund's performance, while the bottom half of the portfolio is a long tail of micro-exposure positions, each with less than 1% allocation.

What about sectors though?

As of early 2026, the fund's top three sectors are capital goods (14%), healthcare (9.23%), and auto (8%).

Nippon India Small Cap Fund: Top 10 Sector Wise Holdings

Meanwhile, its top 10 holdings include MCX, HDFC Bank, Karur Vyasa Bank, Apar Industries, among others.

Top 10 Holdings of Nippon India Small Cap Fund

How has Nippon India Small Cap Fund Fared in Terms of Performance?

Since inception, the fund has generated annualised return of 28%. In comparison, the benchmark has given annualized returns of 15.7%.

This shows consistent alpha generation across bull markets, crashes, a global pandemic, and a rate cycle.

Here is a table showing the scheme's performance across different time horizons...

Nippon India Small Cap Fund: Performance Review

Its beta is 0.85, lower than the category average of 1.04, indicating lower sensitivity to broad market swings than peers.

Simply put, this fund can be bumpier during normal market movements, but it tends to hold up better when markets fall sharply. That is actually a favourable combination for long-term SIP investors.

How Nippon India Small Cap Fund Manages its Massive AUM?

As of March 2026, Nippon India Small Cap Fund has an AUM of over Rs 600 bn.

A typical small-cap stock might have a market cap of Rs 30 to Rs 80 bn.

So, if Nippon India Small Cap Fund wants to deploy just 1% of its current AUM into a single company, that amounts to Rs 6 bn.

For a company with a Rs 50 bn market cap, that is a 13%+ stake, far beyond what is practically acquirable in the open market without moving the price significantly.

This is the "impact cost" problem that Small Cap funds face.

The fund simply cannot infinitely add more stocks (diluting returns in the tail) and cannot add more to existing holdings (limited float), and it even cannot freely exit positions when needed (inadequate buyers).

This is the winner's curse of small cap investing at scale.

However, in the recent past, Nippon India Small Cap fund has taken bold measures to overcome these challenges:

1) Restricting fresh inflows: The fund restricted lump sum subscriptions in July 2023.

2) Increasing large cap exposure: Presently, largecaps constitute about 14.87% of its portfolio, up from around 7% in 2021. SEBI mandates that only 35% of a smallcap fund's assets can be in non-small cap stocks. The fund is using this buffer meaningfully.

3) Expanding the stock universe: The fund continues to venture beyond the Nifty Smallcap 250 index into what can be termed microcaps, companies ranked beyond the top 500 by market capitalisation. As of recent portfolio disclosures, a meaningful portion of the fund's assets remains in such off-index names.

So, has size actually hurt the fund's returns? Looking at the data objectively, not entirely.

Conclusion

So, what's the verdict? Should you stay the course with the fund, exit it, or enter the fund if you don't already hold it?

If you are an existing SIP investor with a 7-to-10-year investment horizon, there is little reason to panic. The fund's core strategy remains intact, the fund manager has navigated multiple market cycles, and the long-term alpha generation track record is genuine. Continue your SIPs and revisit every year.

If you are considering a fresh SIP, this remains a reasonable option for the small cap allocation in your portfolio but temper your return expectations. The days of 35%+ CAGRs on this fund are likely behind us, simply by virtue of its scale. Think of it as a high-quality compounder.

One thing is fairly certain: Nippon India Small Cap Fund is no longer a scrappy outperformer punching above its weight. It has become the weight class.

The question every investor must answer is whether they are comfortable with that.

Always make sure to carefully analyse the scheme's risk ratios, fund managers' expertise, and other key performance indicators.

Happy investing.

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