MF Tracker: Can this top performing smallcap fund keep winning streak alive?

Bandhan Small Cap Fund emerged as the topper in the last five years based on the daily rolling returns, delivering impressive returns of around 34.07% in the same period. The important question now comes, can the fund sustain its performance and continue to attract investor interest going forward as well?

Launched on February 25, 2020, the scheme is given four star rating by ValueResearch and five star rating by Morningstar.

Looking at the performance of this scheme based on daily rolling return the scheme offered 34.07% CAGR in the last five years and around 29.28% in the last three years.

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Based on the trailing returns, in the last three and six months, one year and three years, the scheme has managed to outperform its benchmark and category average. In the last three and six months, the scheme has managed to limit the downside volatility. The scheme lost around 15.71% in the last three months against a loss of 17.26% by the benchmark (BSE 250 Small Cap – TRI) and a loss of 16.75% as the category average.

In the last six months, the scheme lost 15.27% against a loss of 19.02% by the benchmark and a loss of 16.52% as the category average.In the last one year, the small cap fund gave a return of 11.59% against a loss of 2.81% by the benchmark and an average return by the small cap funds of around 1.47%. In the last three years, the scheme gave 22.83% CAGR against 15.23% by the benchmark and 15.31% as the category average. In the last five years, the scheme offered 36.04% against 36.33% by the benchmark and 35.28% as the category average.Based on yearly returns since 2021, the scheme lost 6.13% in 2022. The scheme gave 52.45%, 53.60%, and 43.12% in 2021, 2023, and 2024 respectively. Note, we considered the yearly returns from 2021 because the scheme was launched in February 2020 and the yearly returns for 2020 would not show the correct picture.

Fund managers comment on performance

“February was a tough month for the market, with the Nifty 50 recording its fifth consecutive monthly loss, marking the longest losing streak in nearly three decades. All sectors ended the month in the red, with Financials holding relatively better, while Real Estate, IT, and Industrials saw deep sell-offs. Mid- and small-caps suffered significantly deeper falls than the large caps,” commented Manish Gunwani and Kirthi Jain.

“Overall with better valuations and an improving macro backdrop, we are more constructive. The fall in the dollar, correction in energy prices, RBI shifting a bit more to a dovish stance, government spending picking up, etc. may improve the prospects of Indian markets,” they added.

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Expert comment on fund performance

An expert believes that the fund’s success is driven by a strong and disciplined investment framework that emphasizes identifying smallcap businesses capable of doubling in three to four years and what particularly stands out is its nimble approach to stock selection and sector allocation.

“For example, in 2023, while the fund captured opportunities in sectors like PSUs and energy, it maintained controlled sizing to limit concentration risk. As valuations in cyclicals became stretched, the fund dynamically shifted its focus, gradually reducing exposure to PSUs and other overvalued cyclical sectors, while increasing allocations to defensive sectors like healthcare, telecom, and internet,” commented Sagar Shinde, VP of Research at Fisdom

The expert further adds that A key positive has been the addition of Manish Gunwani as fund manager in 2023, a seasoned professional with over a decade of fund management experience and a proven stock-picking track record at ICICI and Nippon AMC.

“His expertise has contributed meaningfully to the fund’s turnaround and active management approach. This active sector rotation, combined with a focus on scalable businesses, has helped the fund navigate different market phases successfully. However, as with all smallcap strategies, investors should be prepared for interim volatility despite the fund’s strong historical performance,” Shinde further explained.

A monthly SIP of Rs 10,000 made in the fund at the time of its inception would have been Rs 12.05 lakh now with an XIRR of 27.16%. In the last three years, the same SIP investment amount would have been Rs 5.15 lakh with an XIRR of 26%.

A lumpsum investment made in the fund at the time of inception would have been Rs 4.01 lakh now with a CAGR of 31.28%. In the last three years, the same amount would have been Rs 1.83 lakh with a CAGR of 22.36%.

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The small cap fund had an allocation of 91.63% in equity and 8.37% in others as on February 28, 2025. The small cap fund allocates 65-100% in equity and equity related instruments of small cap companies, 0-35% in equity and equity related instruments of other companies, 0-35% in debt securities and money market instruments (including government securities, securitised debt and cash and cash equivalents), and 0-10% in units issued by REITs and InvITs.

With the market experts recommending to cut exposure in small cap funds, Shinde believes that while the recent correction in smallcaps offers a better entry point compared to a few months ago, valuations in the segment remain elevated and investors should avoid making aggressive lump sum allocations at this stage.

“A more prudent strategy would be to stagger investments through SIPs or STPs over the next 6–12 months. Instead of concentrating solely on Bandhan Small Cap Fund, investors can consider adding one more smallcap fund with a distinct stock selection approach to complement it and add more value. This can help diversify investment styles without spreading too thin. Investors must also be prepared for near-term volatility and should have a long-term horizon of at least 5–7 years when investing in smallcaps,” he recommended.

In comparison to the small cap category, the scheme is overweight on others. The small cap category on an average had 91.86% in equity, 7.98% in others and 0.16% in debt.

The fund had the highest allocation in the healthcare sector of around 12.47% compared to 10.20% by the category. In the finance sector, the scheme had an exposure of 11.98% against 7.40% by the category. Among the top 10 sector holding, the small cap fund is overweight on healthcare, finance, bank, realty, textile. It is underweight on chemicals, automobiles & ancillaries, FMCG, and IT.

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The top 10 stocks of the fund constitute 20.33% to the total portfolio as on February 2025. Based on the last three years, the scheme gave a Treynor ratio of 1.96 and an alpha of 0.63. The sortino ratio of the scheme was recorded at 0.61. The return due to net selectivity was recorded at 0.59 and return due to improper diversification was recorded at 0.04 in the last three years.

The investment style of the fund is to invest in growth oriented small cap stocks. According to February 28, 2025 (last available portfolio), the scheme had 181 stocks in its portfolio. The scheme had an AUM of Rs 8,474 crore, the 11th largest in the small cap category.

Bandhan Small Cap Fund is an open ended equity scheme investing predominantly in small cap stocks. The objective of the scheme is to generate long term capital appreciation by investing predominantly in equities and equity linked securities of the small cap segment.

The scheme is benchmarked against BSE 250 SmallCapTRI and is managed by Mr. Manish Gunwani and Kirthi Jain.

Apart from Bandhan Small Cap Fund, there are 20 funds in the small cap category who have completed five years of existence. According to the market regulator, Sebi, these schemes should have a minimum investment in equity and equity related instruments of small cap companies of around 65% of total assets.

Way forward for small caps

According to Shinde, the short-term outlook for small caps remains cautious, with market volatility, profit booking, and rich valuations putting some pressure on this segment. “Several small-cap stocks have already seen corrections of over 20%–30% from their highs. However, such corrections can often present opportunities for long-term investors,” he adds.

“I believe that the recent cool-off is healthy and sets the stage for a more sustainable rally going ahead. The structural growth story for small caps remains intact, driven by domestic growth, formalization, and the rise of new-age businesses. Investors should keep expectations realistic and stay focused on a 5–7-year+ horizon. A staggered investment approach, allocation discipline, and fund selection that balances scale, quality, and performance will be key to navigating this phase successfully,” Shinde further added.

One should always choose a scheme based on risk appetite, investment horizon, and goals.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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