Pros & Cons of Investing in Bandhan Small Cap Fund

The data released by the Association of Mutual Funds in India (AMFI) reveals that inflows into equity mutual funds declined 22% in August to 334 billion (bn) from the previous month.

Yet small cap funds have received sizeable inflows over Rs 49 bn, the third highest among the 11 sub-categories of equity mutual funds.

It shows that investors are betting on smallcaps even though the trailing PE of the Nifty Smallcap 250 Index is above the 5-year average and the margin of safety is narrow.

Perhaps investors are enticed by the past returns generated by smallcaps, overlooking the fact that they may or may not necessarily repeat in the future. Plus, they are placed on the higher end of the risk-return spectrum.

One fund that is gaining the attention of investors is Bandhan Small Cap Fund.

This scheme was launched in February 2020 during the COVID-19 pandemic. The low of the market in the ensuing month of March 2020 provided a good opportunity for its portfolio construction.

Over the last 5 years, the fund has seen its Assets Under Management (AUM) increasing to over Rs 145 bn as of 31 August 2025.

How Does Bandhan Small Cap Fund Invest Your Money?

As per the mandate and regulatory guidelines, the scheme invests at least 65% of its assets in equity and equity-related instruments of smallcap companies.

The capital market regulator defines smallcap stocks as companies ranking beyond 250 in terms of full market capitalisation. These companies have the potential to become market leaders of tomorrow, as they are often in the growth stage.

Other than that, up to 35% may be invested in other than smallcap companies, which may include foreign securities as well.

The fund primarily focuses on quality, growth, and reasonable valuations (a 3-pronged strategy) when investing in smallcaps, while following a growth style of investing for its portfolio construction.

In the last one year, it has consistently held over 68% of its total assets in smallcaps, while midcaps have ranged between 9% to 14%. Considering valuations, it has also held 5% to 9% in largecaps.

Besides, the fund is currently holding a little over 12% in cash & cash equivalents.

Moreover, it has the mandate to invest up to 50% of the total assets in derivatives other than for hedging purposes.

Also, up to 10% of the total assets may be invested in units of REITs & InvITs.

Other than that, for defensive consideration and to manage liquidity, the scheme also allocates up to 35% of the total assets in debt & money market securities (including Government securities, Securitised debt and Cash and Cash equivalents).

Should investors consider this fund?

In this editorial, let's discuss the pros and cons of investing in the Bandhan Small Cap Fund.

Pros

#1 Fairly Diversified Portfolio

Bandan Small Cap Fund typically holds 180-200 stocks in its portfolio. Currently, it has 213 stocks, and the top 10 stock holdings are less than 20% making it well-diversified.

The exposure to a wider set of opportunities allows participation in niche segments, emerging trends, and turnaround stories that are not available in a concentrated portfolio.

The top 10 stocks include names such as Sobha (3.2%), South Indian Bank (2.2%), REC (2.1%), etc.

Among the diverse range of sectors, the top 5 are finance (11.8%), healthcare (11.4%), realty (8.2%), banks (8.1%), and capital goods (5.1%), comprising 44.7% of the portfolio.

It invests in businesses whose market share is gaining, there is significant room for scalability, and which are backed by passionate managements.

It looks for healthy return on invested capital, profitability, cash flows, along with reasonable valuations with rerating potential.

This fund avoids overleveraged businesses and excessive risk-taking.

In other words, the stock selection strategy is based on the GARP (Growth At Reasonable Price) strategy.

The fund's portfolio has a lower PE compared to the Nifty Smallcap 250 index.

Moreover, it holds the portfolio with a long-term view, as reflected by the low portfolio turnover ratio in the range of 30-75% in the last one year.

The fund predominantly runs with an absolute return thought process rather than a benchmark-centric one.

#2 Decent Returns

Over 3 years and 5 years, the fund has delivered a compounded annualised return of 31.6% and 36.8%, respectively, noticeably higher than the category average returns and its benchmark, the Nifty Smallcap 250 - TRI.

On risk-adjusted returns as well, as denoted by the sharpe and sortino ratios of 0.39 and 0.81, respectively, the fund has been an above-average performer.

Cons

#1 High Risk

To generate returns, Bandhan Small Cap Fund exposes its investors to very high risk. This is reflected by the annualised standard deviation (SD) of 17.72, which is higher than many of its category peers.

Also, the fund has subjected investors to higher downside risk, which means that in the corrective phase, the drawdown is greater.

#2 Hasn't Witnessed Many Market Cycles

While being launched during the pandemic lows gave an advantage for portfolio construction, it has witnessed only 2 cycles: a brief bear phase from 14 January 2020 to 23 March 2020, and thereafter a bull phase from 24 March 2020 to date.

The latter phase, where the smallcaps have fared exceptionally well, has worked in favour of the fund. But one also needs to see how the fund fares in case of corrections and painful bear phases as well.

Conclusion

In a short span of five-and-a-half years since its launch, Bandhan Small Cap Fund has delivered attractive returns for investors. The rally in smallcaps since the pandemic lows has worked in favour of the fund.

That said, the fund has also exposed its investors to higher risk than its category peers, and downside risk could be high, in case of a deep correction or if the market gets in the grip of bears.

What's positive is the GARP approach followed, which could make it possible to pick stocks at reasonable valuations in case of a correction or bear phase.

It is best not to invest in Bandhan Small Cap Fund - or any mutual fund for that matter - based on past returns.

Also, avoid taking a short-term view. Ensure you have an investment horizon of at least 7-8 years and the stomach for very high risk when investing in small cap funds.

Be a thoughtful investor.

Happy investing.

#Table Note: Data as of 15 September 2025
Rolling period returns are calculated using the Direct Plan-Growth option. Returns over 1 year are compounded annualised.
Standard Deviation indicates total risk, while the Sharpe Ratio and Sortino Ratio measure the Risk-Adjusted Return. They are calculated over 3 years, assuming a risk-free rate of 6% p.a.
*All small mutual fund schemes are considered to compute the category average returns.
Please note that this table represents past performance. 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.

Disclaimer: This write-up is for information purposes and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme-related documents carefully. Registration granted by SEBI, enlistment as IA with Exchange and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.