MF Tracker: Bandhan Small Cap Fund tops 3-year returns. Can the outperformance continue?

Bandhan Small Cap Fund emerged as the top performer over the last three years, delivering an impressive 25.35% return during the period among equity mutual funds, excluding sectoral and thematic funds. The key question now is whether the fund can sustain its strong performance and continue to attract investor interest going forward.

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

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Based on the trailing returns, the fund has managed to outperform its category average in the long term and the data for the benchmark was not available for comparison.

In the last three months, the fund delivered a return of 6.71% and the category average was 8.80%. In the last six months, the fund delivered a return of 13.61% and the category average was 15.92%. The fund posted a gain of 8.05% in the last one year and the category average was 8.60%.

The fund delivered a return of 25.35% in the last three years and the category average was 16%. The fund posted a gain of 18.08% in the last five years compared to 15.48% as the category average. Since its inception, the fund has delivered a CAGR of 28.64%.

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. In 2025, the fund lost 1.13%. 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.

Among all small cap funds, the fund has neither offered the highest return nor lost the most on yearly return basis.

Expert comment on fund performance

Shweta Rajani, Head - Mutual Funds, Anand Rathi Wealth Limited analysed the performance and told ETMutualFunds that the outperformance was driven almost entirely by stock selection, which contributed 13.05% to returns, while sector allocation had a negligible impact at -0.19% which suggests the fund added value by selecting stronger companies within sectors rather than relying on sector bets.

She further said that financial services was the biggest contributor, adding 6.83% to performance on the back of a 29.26% portfolio return and an allocation of nearly 20%. Basic materials contributed 4.90% and consumer cyclical added 4.16%, across most sectors, portfolio returns consistently exceeded benchmark returns, even where sector weights were broadly similar and the fund's outperformance therefore came primarily from selecting the right companies rather than taking aggressive sector calls.

A monthly SIP of Rs 10,000 made in the fund at the time of its inception would have been Rs 16.98 lakh now with an XIRR of 24.45%. In the last three years, the same SIP investment amount would have been Rs 4.35 lakh with an XIRR of 15.18% and in the last five years, the value of same monthly investment would have been Rs 9.97 lakh with an XIRR of 21.50%

A lumpsum investment made in the fund at the time of inception would have been Rs 5.05 lakh now with a CAGR of 28.61%. In the last three years, the same amount would have been Rs 1.97 lakh with a CAGR of 25.53%. The same lumpsum investment made five years ago would have been Rs 2.27 lakh with a CAGR of 17.83%.

Bandhan Small Cap Fund: invest now or wait for a better entry point?

After seeing the stellar performance by this fund, the expert said that investors should not view the past performance of a fund as the sole factor when deciding whether to invest and the investment decisions should be driven primarily by an investor's long-term strategy.

“Every investor should evaluate a fund in terms of returns, risk and market-cap allocation to understand how it fits into the overall portfolio, investors should have an allocation of 55% in large caps, 23% in mid caps and 22% in small caps.”

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She further said that currently, after the recent correction, the market is in negative froth, which can serve as a good entry point for long-term investors and those who are doing SIP can continue and those with funds available can go ahead and invest as a lumpsum, staggering it across 4-6 weeks.

Key risk ratios

Based on the last three years, the scheme gave a Treynor ratio of 1.59 and an alpha of 1.34. The sortino ratio of the scheme was recorded at 0.66. The return due to net selectivity was recorded at 1.16 and return due to improper diversification was recorded at 0.18 in the last three years.

The investment style of the fund is to invest in growth oriented small cap stocks. According to June 2026 (last available portfolio), the scheme had 254 stocks in its portfolio. The scheme had an AUM of Rs 28,466 crore as of June 30, 2026.

Which metrics matter beyond returns?

Apart from analysing the performance, which other metrics matter for small cap funds? The expert said investors should evaluate not just returns, but risk and risk-adjusted returns to understand a fund's performance.

“If we look at the risk metrics of small-cap funds over the last 3 years, we see that over the last three years they have had a beta of 0.85 and a standard deviation of around 20. Since the beta is below 1, it shows that small-cap funds have actually been less volatile than the broader market, despite many investors believing they are much riskier. If we look at risk-adjusted returns, the Sharpe ratio comes out to 0.46, while the Sortino ratio is 2.44, showing that much of the volatility is from upside movements rather than downside.”

Over the last 20 years, the Nifty Smallcap 250 has declined by around 25%. Most of these corrections lasted only three to four months, with markets typically recovering to their previous peaks within 12 to 18 months, the expert further said.

The small cap fund had an allocation of 91.82% in equity and 8.18% in others as on June 2026. The fund holds 6.12% in large caps, 13.25% in mid caps, 8.29% in others and 72.34% in small caps indicating that the fund is overweight on mid caps and others compared to the small cap category.

The fund had the highest allocation in the finance sector of around 13.30% compared to 8.12% by the category. In the healthcare sector, the scheme had an exposure of 9.53% against 10.96% by the category. Among the top 10 sector holding, the small cap fund is overweight on finance, bank, realty, IT, FMCG, textile and iron & steel. It is underweight on healthcare and capital goods. The fund holds 5.71% in the chemicals sector and this was the same as the category allocation.

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Small cap basket and valuations

Apart from Bandhan Small Cap Fund, there are 24 funds in the small cap category who have completed three years of existence. ITI Small Cap Fund delivered the second highest return of 23.19% in the last three years.

Nippon India Small Cap Fund, the largest small cap fund based on the assets managed, delivered a return of 15.84%. Tata Small Cap Fund delivered the lowest return of 10.51% in the last three years.

According to a report by Motilal Oswal, valuations have corrected meaningfully from Sep-24 highs – Nifty 50 now trades below its 10-year average while extension of premium in mid & small cap over 10-yr average has come down over the last 18 months.

Way forward for small caps

The expert said that the outlook for small caps is positive and it is important for investors to understand that the perceived volatility of small caps is often much higher than the actual volatility, as seen earlier.

She further said that if we look at the earnings forecast for the Nifty Smallcap 250, earnings are expected to rebound strongly, growing by 20% in FY27 and a further 18% in FY28, at the same time, the index is currently seeing negative froth, trading around 15% below its fair value which indicates that long-term growth potential remains strong and the current correction provides a good opportunity for long-term investors to participate in India's growth story.

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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