Nifty Down 12.9%, These 3 Small-Cap Funds Gained Up to 15%: What Did They Get Right?

As a result, India’s VIX, or volatility index, has jumped by over 80% since the start of 2026, indicating that investors, in general, are fearful and expect stock market turbulence, sharp price swings and uncertainty. If we look at the returns on a year-to-date (YTD) basis, the bellwether Nifty 50 Index is down 12.9%, the Nifty 100 (which represents large-cap companies) is down 11.4%, the Nifty Midcap 150 Index is down 6.1%, while the Nifty Smallcap 250 Index is marginally up 1.6%.

In other words, small-caps have outperformed mid-caps and large-caps, backed by stronger corporate earnings growth. Moreover, small-caps are actively participating in India’s growth story across cables & wires, sanitation, power, engineering, and data centre infrastructure. The longer-period returns also show that small-caps have outperformed larger companies. Thus, investor participation in small caps remains high, driven by hopes of better returns.

According to Association of Mutual Funds in India (AMFI) data, small-cap funds have seen persistent net inflows over the nine months through 2026 with an increasing trend. In September 2026, small-cap funds reported net inflows of Rs 9,039 crore, and cumulatively, around Rs 55,231 crore, the highest among all equity fund subcategories. 6% increase in their Assets Under Management (AUM). However, while you invest your hard-earned money into small-cap funds in the endeavour to earn better returns, what you also need to understand is the risk the fund exposes you to.

Small-cap funds sit at the very high end of the risk-return spectrum, just a notch below sector & thematic funds. Ideally, you should own only those small-cap funds that expose you to low risk (as denoted by the standard deviation) and, more so, which protect the downside risk better. Looking only at returns isn’t a conclusive way to select mutual funds. It’s also a myth that the larger a small-cap fund's AUM, the more stable it is.

In reality, some smaller small-cap funds by AUM have been managed better in terms of risk and risk-adjusted returns, accounting for downside risk. While the market has been rather volatile this year, here are the top 3 small-cap funds in India that have completed at least a 3-year performance track record, have a decent size AUM (not large), are lesser known, and who have exposed investors to low risk or reported lower drawdowns than their peers. #1 ITI Small Cap Fund: This fund was launched in February 2020, just before the COVID-19 pandemic lows.

The sharp correction of nearly 57% since the previous peak of January 2018 offered a good opportunity to construct its portfolio and ultimately paid off, delivering a 21.1% compounded annualised return (CAGR) since its inception. Over the past 3 and 5 years, ITI Small Cap Fund has clocked a handsome 22.0% and 16.9% CAGR, respectively. And with this impressive performance, this lesser-known fund boasts an AUM of Rs 3,666 crore (as of September 2026).

Even in this challenging year for wealth creation, ITI Small Cap delivered 15.0% YTD absolute returns compared to -0.1% clocked by the BSE 250 SmallCap Index and the category average of 6.0% (as of 27 October 2026). Returns: ITI Small Cap Fund Absolute Returns (%)CAGR (%)6 MthsYTD1 Yr3 YrsITI Small Cap Fund11.515.011.522.0Category Average4.56.02.614.2BSE 250 SmallCap TRI-0.1-0.1-3.611.3Direct Plan and Growth Option consideredThe returns data is as of 27 October 2026Source: Value Research The fund managers, Dhimant Shah and Alok Ranjan, have navigated the turbulent market with discipline and favourable sector positioning.

The fund maintained high exposure to growth themes, such as engineering/industrials, healthcare, chemicals, financial services, etc. Stocks such as Karur Vysya Bank, VA Tech Wabag, and Laurus Labs, among others in the portfolio, performed consistently well. Moreover, its lean corpus allowed fund managers to manoeuvre smoothly, making fresh entries and exits. During January 2026 to September 2026, it aggressively added Acutaas Chemicals, making it one of the portfolio's largest holdings.

Likewise, it added Quality Power Electrical Equipment (to capitalise on power transmission and grid capex expansion), Inventurus Knowledge Solutions (which provides healthcare solutions through its care enablement platform), and UrbanClap Technologies in a private placement, among others. Similarly, from January to September 2026, it fully exited or pruned stocks such as Tega Industries, Sterling & Wilson Renewable Energy, Craftsman Automation, and a few other laggards.Typically, ITI Small Cap Fund has held 75-80 stocks in its portfolio.

As of the September 2026 portfolio, the fund holds 86 stocks: over 70% small-caps, 22% mid-caps, and 8% large-caps. The top 10 holdings make up 21.8% of the portfolio, while the top 3 sectors account for 52.8%, making it well diversified. Top Holdings of ITI Small Cap Fund Data as per the September 2026 portfolioSource: Fund Factsheet To generate returns, the fund often churns the portfolio: the turnover ratio has been 124% in the past one year.

Despite this, the fund has not exposed its investors to unduly high risk. Risk and Risk-adjusted returns: ITI Small Cap Fund Std Dev (%)BetaSharpe RatioSortino RatioITI Small Cap Fund20.10.90.891.29Category Average20.40.90.530.82BSE 250 SmallCap TRI21.8-0.380.62Direct Plan and Growth Option consideredThe risk measures are calculated using calendar-month returns for the last three years and are as of 30 September 2026.Source: Value Research Over the last three years, the standard deviation of ITI Small Cap on calendar-month returns is 20.1%, a notch lower than the small-cap category average of 20.4% and 21.8% of the BSE 250 Small-cap index.

The fund’s beta is 0.89, compared with 0.91 for the small-cap funds category, indicating that it managed volatility well. On a risk-adjusted basis, the fund has done well on both the Sharpe ratio (0.89) and the Sortino ratio (1.29). In fact, the Sortino ratio, which accounts for downside risk (downside deviation), shows the fund has outperformed the category average (0.82). Put simply, the fund justified its high portfolio churn by delivering returns while keeping risk in check, particularly downside risk. #2 Invesco India Small Cap Fund: The scheme launched in October 2018, when the small-cap segment was in a long bear cycle that lasted for nearly two years until early 2020.

The timing of its launch created an opportunity to buy small-cap stocks at attractive valuations, which ultimately paid off when small-caps began to rally after the COVID-19 lows. Today, since its inception, the fund has delivered a 22.5% CAGR as of 27 October 2026, and its AUM has grown to Rs 16,131 crore. Over the past 3 and 5 years, Invesco India Small Cap has clocked 20.1% and 17.8% CAGR, respectively.

The fund’s YTD returns are a decent 9.2% (on an absolute basis), while many of its peers are cracking under pressure, and the BSE 250 SmallCap TRI, in comparison, has delivered a -0.1% absolute return (as of 27 October 2026). Returns: Invesco India Small Cap Fund Absolute Returns (%)CAGR (%)6 MthsYTD1 Yr3 YrsInvesco India Small Cap Fund7.19.25.520.1Category Average4.56.02.614.2BSE 250 SmallCap TRI-0.1-0.1-3.611.3Direct Plan and Growth Option consideredThe returns data is as of 27 October 2026Source: Value Research After plunging in February and March, Invesco India Small Cap has recovered impressively from April onward.

The smaller base allowed its fund managers (Taher Badshah and Aditya Khemani) to be far more agile. It rapidly accumulated high-conviction micro/small-cap ideas and swiftly liquidated underperformers without distorting market prices. It made new entries into stocks such as ICICI Bank, Max Financial Services, City Union Bank, etc., and increased stakes in some, such as Prestige Estate Projects, Amber Enterprises, and Max Healthcare Institute, among others, while making complete exits from Afcon Infrastructure, Swiggy, etc. and reduced stakes in Anand Rathi Wealth, EIH, and Aditya Birla Real Estate, among others.

Moreover, pharma and healthcare stocks such as Sai Life Sciences, Krishna Institute of Medical Sciences (KIMS), and Dr Agarwal’s Health Care provided strong downside protection when broader markets faced volatility. Also, as capex momentum slowed in 2026, being underweight capital goods relative to peers helped. With around 65-80 stocks in its portfolio, the fund kept the portfolio well-diversified.

As of September 2026, the fund holds 75 stocks, with 67% in small-cap, 17% in mid-cap, and 15% in large-cap. The top stocks account for 34.2% of the portfolio, while the top 3 sectors account for 31.1%. Top Holdings of Invesco India Small Cap Fund Data as per the September 2026 portfolioSource: Fund Factsheet Over the last year, the fund’s portfolio turnover was 26% as it aimed to maximise gains and minimise risk.

Risk and Risk-adjusted returns: Invesco India Small Cap Fund Std Dev (%)BetaSharpe RatioSortino RatioInvesco India Small Cap Fund19.80.90.821.07Category Average20.40.90.530.82BSE 250 SmallCap TRI21.8-0.380.62Direct Plan and Growth Option consideredThe risk measures are calculated using calendar-month returns for the last three years and are as of 30 September 2026.Source: Value Research Over the last three years, the standard deviation of Invesco India Small Cap on calendar-month returns is 19.8%, lower than the small-cap category average of 20.4% and 21.8% of the BSE 250 Small-cap index.

The fund’s beta of 0.86, compared with 0.91 for the small-cap funds category, indicates lower volatility. On a risk-adjusted basis, the fund has fared better on both the Sharpe ratio (0.82) and the Sortino ratio (1.07). In fact, the Sortino ratio, which accounts for downside risk, shows the fund has performed better than the category average (0.82). Put simply, the fund has delivered appealing returns by managing downside risk (drawdown) better, protecting investors, rather than losing investors' hard-earned money. #3 Bandhan Small Cap Fund: This fund was also launched in February 2020 just before the COVID-19 pandemic lows, giving it the advantage of building a small-cap-oriented portfolio when valuations were depressed or cheap.

The multi-year bull run that followed, particularly in small-caps, enabled it to compound wealth, clocking a stellar 28.7% CAGR since inception (as of 27 October 2026). Attracted by the strong returns, AUM has also grown and is currently over Rs 35,856 crore as of 30 September 2026. Over the past 3 and 5 years, Bandhan Small Cap Fund has clocked 22.4% and 18.1% CAGR, respectively. The fund’s YTD returns are a decent 6.3% (on an absolute basis), a bit higher than the category average (6.0%) and way above the BSE 250 SmallCap TRI (-0.1%) as of 27 October 2026.

Returns: Bandhan Small Cap Fund Absolute Returns (%)CAGR (%)6 MthsYTD1 Yr3 YrsBandhan Small Cap Fund3.06.32.822.4Category Average4.56.02.614.2BSE 250 SmallCap TRI-0.1-0.1-3.611.3Direct Plan and Growth Option consideredThe returns data is as of 27 October 2026Source: Value Research To generate returns, the fund stuck to its growth at a reasonable price (GARP) framework and avoided chasing inflated momentum stocks.

Instead, the fund took tactical, high-conviction stock and sector exposure. For instance, in 2026, which has been a challenging year for Indian equities, fund managers (Manish Gunwani and Kirthi Jain), maintained strategic exposure to sectors benefiting from domestic growth tailwinds, such as pharma & healthcare, banks, and power, among others. Stocks such as South Indian Bank and Karnataka Bank (which benefited from net interest margin expansion and improved asset quality metrics) helped in the fund’s NAV expansion.

Similarly, PNB Housing Finance has performed exceptionally well since April this year, as housing finance demand has remained resilient and credit costs have declined. Jubilant Pharmova, an integrated global pharma company, also performed well on the back of a recovery in its radiopharmaceuticals division and active pharmaceutical ingredient (API) margins. Over the past nine months, Bandhan Small Cap Fund also added positions in stocks such as Inox Wind Energy, Awfis Space Solutions, PN Gadgil Jewellers, and Strides Pharma.

It completely exited or pruned its portfolio in stocks such as Kalpataru Projects International (due to global project execution delays and debt/working-capital drag), JK Paper (due to pricing pressure in the paper industry) and Jyoti CNC Automation, among others. Typically, Bandhan Small Cap Fund holds a very large portfolio of 200-250 stocks. As of the September 2026 portfolio, the fund holds 261 stocks: nearly 81% small-caps, 11% mid-caps, and 8% large-caps.

The top 10 holdings make up 17.3% of the portfolio, while the top 3 sectors account for 47.0%. Top Holdings of Bandhan Small Cap Fund Data as per the September 2026 portfolioSource: Fund Factsheet To generate returns, the fund does not churn its portfolio; the turnover ratio has been only 24% in the past year, suggesting it holds stocks with high conviction and a buy-and-hold approach (with a long-term horizon of 3-5 years or more) rather than short-term momentum or quarterly earnings pops.

This helps keep risk in check while still delivering returns. 50.90.871.42Category Average20.40.90.530.82BSE 250 SmallCap TRI21.8-0.380.62Direct Plan and Growth Option consideredThe risk measures are calculated using calendar-month returns for the last three years and are as of 30 September 2026.Source: Value Research Over the last three years, Bandhan Small Cap's standard deviation on calendar-month returns is almost in line with the category average (20.4%), but lower than the BSE 250 Small-cap index (21.8%).

The fund’s beta is also in line with the category average for small-cap funds. On a risk-adjusted basis, the fund has done well on both the Sharpe ratio (0.87) and the Sortino ratio (1.42). The Sortino ratio shows the fund's risk-adjusted returns are better, while it has protected downside risk and limited drawdowns. How to Approach Small Cap Funds? Benjamin Graham, the father of value investing and Warren Buffett's mentor, has famously articulated, “The essence of investment management is the management of risks, not the management of returns.”

So, when you add a small-cap fund to your portfolio, it's also important to assess how it manages risk while generating returns. This shall help safeguard your mutual fund portfolio from significant drawdowns. Also, keep an eye on valuations when investing, rather than getting carried away by irrationality. Valuation Headwinds: Navigating Small Caps at 31.8x P/E Despite the sharp correction in small-cap stocks in October, valuations remain elevated.

The Nifty 250 Small Cap Index is trading at a P/E ratio of 31.8, above its 5-year median of 28.3. ,This suggests that small caps are still not cheap, and the risk of further downside persists amid geopolitical tensions, elevated oil prices, inflation risks and cost pressures. Consider small-cap funds only if you have a very high-risk appetite and an investment horizon of at least 7-10 years. Moreover, allocate a sensible portion of your portfolio to small-cap funds based on your financial goal, rather than going overboard or chasing top-performing funds.

Invest sensibly; be a thoughtful investor. Happy investing! Note: We have relied on data from www.valueresearchonline.com, www.financialexpress.com, and the factsheets published by the respective fund houses throughout this article. Only in cases where the data was not available have we used an alternate but widely used and accepted source of information. Returns data as of 27 October 2026. Direct Plan and Growth Option Considered.

Portfolio data is as of 30 September 2026. Standard deviation measures the fund’s total volatility. The Sharpe Ratio measures risk-adjusted return and shows how much excess return an investment generates for each unit of risk taken. Disclaimer The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Past returns are not indicative of future returns.

Please consult your financial advisor before investing. Rounaq Neroy has over 20 years of experience in the financial markets and investments. He is a close observer of the Indian economy and writes deeply on the capital markets, mutual funds, stocks, precious metals, asset allocation, wealth management, and investment strategy. His editorials provide interesting, actionable investment ideas to guide readers in the journey of wealth creation and make wise decisions.

Rounaq was the Head of Content at PersonalFN (Quantum Information Services Pvt. Ltd.), which also owns Equitymaster.com – India’s oldest and trusted equity research house.