Small Cap Funds Down Over 10% in the Recent Market Correction

The small-cap segment is once again under pressure, reversing a strong two-year run that had attracted massive investor interest.

After delivering spectacular returns in 2023-24, valuations in this space had risen well above long-term averages, leaving many small-cap stocks vulnerable to even a mild shift in sentiment.

As global and domestic cues turned mixed this year including slower earnings growth, nervousness around interest rates, and profit-booking across riskier pockets of the market, the small-cap universe was among the first to correct.

This correction has been sharp and broad-based. The small-cap index has slipped noticeably over the past few months, and the impact on small-cap mutual funds has been even more visible.

The small-cap index that started in late December 2024 near 23,000 fell precipitously to 17,405 by March of 2025, one of the sharpest corrections in recent years.

A modest recovery from April lacked momentum; the index finished the year near 20,500, reflecting persistent volatility and weak follow-through buying.

This resulted in many popular small-cap schemes losing 7-10%, with some even recording double-digit losses, led by increasing volatility, lower liquidity, and renewed interest in large-cap names.

Retail SIP inflows remained resilient, but lump-sum investments slowed down, while institutional investors pruned high-valuation stocks in favour of quality names.

Despite the correction, the long-term growth story for small caps remains, though 2025 underscores the category's inherent volatility. Where investors are concerned, the question now is whether this decline is a temporary shakeout or a broader shift that calls for restraint.

This editorial explores this correction in detail and underlines the funds that have been hit worst.

How smallcap funds fared in the last one year

Category	10-Dec-24 to 10-Dec-25 Returns (%)
Top Performing Scheme	-3.80
Bottom Performing Scheme	-12.39
Category Average	-8.04
BSE 250 Small Cap - TRI	-11.73
Nifty Smallcap 250 - TRI	-11.87

Source: ACE MF

While short-term performance is not a reliable indicator of a fund's long-term potential, sharp market phases such as this serve as an important reminder to reassess portfolio quality and resilience.

The small-cap category has clearly felt the brunt of the correction, with the category average falling over 8% and several schemes dropping into double-digit negative territory.

Both benchmark indices have also declined by nearly 12%, signalling broad-based pressure across the entire small-cap universe.

Given this backdrop, it becomes essential to identify schemes that are better equipped to handle market stress. Only funds that demonstrate consistency across multiple market cycles not just in bull phases could realistically be expected to generate sustainable alpha over the long term.

Investors, therefore, should use such periods of volatility to evaluate whether their small-cap fund holdings have the necessary portfolio strength, risk controls, and stock-selection discipline to weather downturns effectively.

Let us have a look at the 5 popular Small Cap Funds that are down by over 10% in the recent market correction.

#1 LIC MF Small Cap Fund

Launched in June 2017, LIC MF Small Cap Fund is a pure small-cap strategy focused on identifying high-growth emerging businesses.

However, the recent market volatility has impacted it far more than its peers, making it one of the worst-hit schemes in the current correction.

The fund has declined 16%, a much steeper fall than both the category average and the benchmark small-cap indices. Its higher allocation to smaller, less liquid companies amplified the downside as the small-cap segment corrected through 2025.

With several mid and small-sized holdings facing valuation cuts and weaker earnings visibility, the fund's NAV dropped more sharply than the Nifty Smallcap 250 TRI.

Despite the short-term setback, the fund may still find support if valuations cool further and market sentiment stabilises.

However, for existing investors, this phase is an important reminder to evaluate whether their risk tolerance aligns with the fund's inherently volatile investment style.

#2 Tata Small Cap Fund

Launched in November 2018, Tata Small Cap Fund focuses on identifying growth-oriented emerging companies available at reasonable valuations. With a relatively high allocation of 85-95% to small-cap stocks well above the category average the fund carries a naturally higher risk-reward profile.

In the recent correction, the fund has faced notable pressure, with its NAV declining 15.7% since December 2024-slightly worse than the drop in its benchmark. The reflects its significant exposure to smaller, less liquid names, which tend to react more sharply during volatile phases.

Despite its disciplined stock-picking approach and diversified holdings the broader valuation decline in the small-cap universe has weighed on performance.

Looking ahead, the fund may recover as earnings visibility improves and risk appetite normalises.

However, its consistently high exposure to smaller companies means stronger gains in rallies could also come with sharper drawdowns during corrections - an important consideration for long-term investors.

#3 Bank of India Small Cap Fund

Launched in December 2018, BOI Small Cap Fund positions itself as a pure-play small-cap strategy aimed at identifying scalable, high-growth businesses at an early stage.

Its portfolio maintains a high allocation to small-cap stocks (63%), making it inherently more sensitive to market swings compared to more balanced peers.

During the recent correction, the fund has come under noticeable pressure, with its NAV declining 13.2% since December 2024 - a deeper fall than its benchmark. This sharper dip reflects its meaningful exposure to smaller, low-liquidity companies that tend to react more aggressively during periods of heightened volatility.

While the fund follows a disciplined investment framework, the broad valuation decline within the small-cap universe has weighed on several of its holdings, limiting the fund's ability to cushion downside effectively.

Looking ahead, the fund could stabilise as market valuations cool and earnings visibility improves.

However, its high small-cap concentration means investors should be prepared for amplified volatility - both on the upside and downside before committing for the long term.

#4 Kotak Small Cap Fund

Launched in February 2005, Kotak Small Cap Fund is one of the most seasoned offerings in the small-cap category. Known for its quality-oriented approach, the fund focuses on scalable businesses with strong balance sheets, sustainable growth potential, and competent management teams.

It typically maintains 75-90% allocation to small-cap stocks, keeping it aligned with category norms while balancing risk and return effectively.

During the recent market correction, the fund has witnessed pressure, with its NAV declining 12% since December 2024 - broadly in line with the broader small-cap index.

The decline reflects sector-wide valuation moderation after a prolonged rally, though the fund's quality tilt has cushioned downside versus peers heavily in illiquid small caps.

The portfolio remains diversified across manufacturing, engineering, and niche industrial stocks.

Looking ahead, the fund is well positioned to benefit when sentiment stabilises, supported by its emphasis on fundamentally strong companies.

However, like all small-cap funds, it may experience periods of higher volatility and sharper drawdowns during market corrections - a key factor long-term investors should keep in mind.

#5 HSBC Small Cap Fund

Launched in May 2014, HSBC Small Cap Fund is a seasoned player in the small-cap space, known for its disciplined investment approach focusing on high-quality, growth-oriented companies. Typically, it maintains around 70% allocation to small-cap stocks.

During the market correction, the fund faced pressure, with its NAV declining approximately 11.9% since December 2024, broadly tracking the small-cap benchmark. The dip reflects sector-wide valuation moderation following an extended rally.

The portfolio is diversified across sectors such as manufacturing, engineering, and specialty industrials. HSBC Small Cap Fund is positioned to benefit once market sentiment stabilises, supported by its emphasis on fundamentally strong companies with scalable business models.

Several of the top-performing small-cap funds, which have historically delivered strong long-term returns like 5-year CAGR of 26-28% and 10-year CAGR of 19-21%, faced notable pressure in the recent correction.

Nippon Small Cap Fund fell around 9% YoY, while Bandhan, Invesco, and HDFC Small Cap Funds declined over 5%.

Even strong long-term performers are vulnerable to small-cap volatility.

Conclusion

Small-cap funds continue to offer substantial long-term growth potential, but they inherently carry higher risk and volatility.

Investors should prioritise quality-oriented portfolios with strong fundamentals and diversification, maintaining a long-term perspective.

Market corrections, while unsettling in the short term, may provide opportunities for disciplined investors to build or reinforce positions in fundamentally strong companies, rather than reacting impulsively to temporary setbacks.

Invest wisely.

Happy investing.

#Table Note: Data as of December 11, 2025
The securities quoted are for illustration only and are not recommendatory
Past performance is not an indicator for future returns.
Returns are on rolling CAGR basis and in %. Direct Plan-Growth option.
Those depicted over 1-Yr are compounded annualised.
Risk ratios are calculated over a 3-year period assuming a risk-free rate of 6% p.a.

Disclaimer: This write up is for information purpose 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 no way guarantee performance of the intermediary or provide any assurance of returns to investors.