Analysis of Small Cap Funds Over the Last 5 Years (2020-2025)

Small-cap mutual funds have been among the most rewarding investment categories over the past five years. Despite periods of market volatility and corrections, these funds have delivered impressive returns, significantly outperforming their mid-cap and large-cap counterparts. Investors who remained committed to their systematic investment plans (SIPs) have seen substantial wealth creation, with several funds posting XIRRs above 25%.

Key Observations

1. Top Performers
• Quant Small Cap Fund delivered the highest XIRR on SIP investments made five years ago, at around 34.50%. A monthly SIP of Rs 1,000 made in the scheme would be worth Rs 1.37 lakh now.
• Bandhan Small Cap Fund delivered an XIRR of 31.95% on the same SIP investments.
• Nippon India Small Cap Fund, the largest fund in the category based on assets managed, offered an XIRR of 30.84% in the said period.
• Tata Small Cap Fund and Bank of India Small Cap Fund delivered XIRRs of 27.76% and 27.73%, respectively, in the similar period.
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2. Majority of Funds Delivered 25%+ Returns
• At least 14 out of 21 funds have posted XIRRs above 25%, reflecting strong wealth creation in this space.
• This performance aligns with historical trends where small-cap funds tend to outperform in bullish cycles.
3. Lower Performers but Still Positive Returns
• The SBI Small Cap Fund (22.02%) and Aditya Birla SL Small Cap Fund (20.36%) were among the lower performers.
• Despite this, even the lowest-ranked fund has delivered double-digit returns, reinforcing the strength of small caps over the long term.
4. Effect of Market Cycles
• While the numbers look great now, small-cap stocks and funds tend to be highly volatile.
• Investors who endured the 2022-2023 corrections have been rewarded, but patience was crucial.

Key Takeaways for Investors

• Long-Term Investing Pays Off: Investors who stayed invested for 5+ years have seen strong returns despite periodic corrections.
• High Risk-High Reward: Small-cap funds have outperformed large-cap and mid-cap funds but also come with higher volatility.
• Fund Selection Matters: The gap between the top performer (34.5%) and the lowest performer (20.36%) highlights the importance of picking quality funds.
• SIP Strategy Works Well: The systematic investment plan (SIP) approach has helped investors average out volatility and benefit from compounding.

Final Thoughts

Small-cap funds have been wealth creators over the past five years, delivering superior returns despite market volatility. However, investors should be prepared for sharp corrections and invest with a long-term horizon to truly benefit from this category. The last five years have reaffirmed the long-term wealth-building potential of small-cap funds. While these funds have delivered exceptional returns, they also come with higher volatility and risk. Investors who adopt a disciplined, long-term approach through SIPs and stay invested through market cycles benefit the most. Going forward, while small-cap funds remain an attractive option for aggressive investors, proper fund selection, risk management, and patience will be key to maximizing gains in this dynamic segment.