All 36 smallcap mutual funds deliver double digit returns in 6 months. Should you invest more or book profits?

Smallcap mutual funds have delivered strong returns over the last six months, with all 36 funds in the category generating double-digit returns. The category delivered an average return of around 25.20% during the period, an analysis by ETMutualFunds showed.

The sharp rise has come after a strong recovery in smallcap stocks following their earlier correction. With the entire category delivering double-digit returns, investors may wonder whether they should continue their SIPs or wait for a market correction before investing further.

Nilesh D Naik, Head of Mutual Fund at PhonePe told ETMutualFunds that the primary driver of the performance was strong Q1 FY27 earnings growth in smallcap companies. Excluding oil and gas, year-on-year earnings growth for smallcap stocks exceeded 30% for the quarter and the rally also followed a sharp correction in smallcap stocks in March 2026.


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Given current valuations, future trends will largely depend on continued earnings growth, Naik said. Investors can continue their SIPs provided they have the risk appetite to withstand the high volatility associated with smallcap funds and their exposure aligns with their broader asset allocation framework, he further said.

Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance shared with ETMutualFunds that recent strong returns were driven by increased domestic liquidity and a sharp recovery in smallcap shares following earlier declines. Market sentiment continues to be highly volatile, and it is still unclear whether the market has reached a bottom or could move lower.

Investors should continue their SIP plans rather than trying to time the market, Minocha said. If their smallcap allocation remains within their target, they can maintain their SIPs. However, investors should avoid pursuing assets that have already experienced significant gains.

The analysis further showed that around nine funds delivered over 30% return in the last six months. Bank of India Small Cap Fund delivered the highest return of around 39.76% in the last six months, followed by Samco Small Cap Fund which gave 36.52% return in the said time period.

TRUSTMF Small Cap Fund and JM Small Cap Fund delivered 35.13% and 33.78% return in the said time period. The other five funds were - Groww Small Cap Fund, Motilal Oswal Small Cap Fund, Helios Small Cap Fund, ITI Small Cap Fund and LIC MF Small Cap Fund that gave over 30% return.

Nippon India Small Cap Fund, the largest small cap fund based on the assets managed, delivered 20.20% return in the last six months. HDFC Small Cap Fund was the last one in the list as the fund gave 12.45% return in the last six months.

Should investors be concerned about chasing recent performance?

With the fact that all 36 smallcap funds delivered double-digit returns and nine funds gave over 30% return in the last six months, it suggests that the recent performance was broad-based rather than limited to a handful of schemes. However, the sharp gains also raise concerns about investors chasing recent performance.

Minocha said the performance indicates broad-based strength rather than isolated outperformance. However, nine funds delivering more than 30% growth in six months is a cautionary signal, as rapid gains may encourage return-chasing.

Short-term performance should not be the primary criterion for selecting a smallcap fund, Minocha said.

Naik said investors should never allocate to a fund category based solely on recent past performance. It is always advisable to follow an asset allocation approach by clearly defining allocation limits for each asset class and category.

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Are smallcap valuations still reasonable for fresh investment?

According to a report by Motilal Oswal Financial Services, small-caps corrected 4% from the peak on a 12-month forward P/E basis. Small-caps are trading 27% above their respective LPA (vs. trading +47% above their respective average in Sep’24).

The report further said that Nifty-50, Mid-cap and Small-cap earnings are expected to grow at 16%/17%/27% CAGR over the next two years. The sharp gains in smallcap funds also raise questions about whether valuations remain reasonable for investors looking to make fresh investments.

Naik said smallcap valuations are not cheap, but he believes there are interesting opportunities for stock pickers in the smallcap space. Investors with a high risk appetite could consider allocating to smallcap funds, provided they have the risk appetite and the allocation aligns with their broader asset allocation framework. Typically, exposure to smallcap funds should not exceed 20–25%, Naik said.

Minocha said that following such a rally, it is prudent to prioritise value. Smallcaps can contribute to long-term growth but are more volatile and carry higher valuation risk.

For long-term investors, smallcaps are best held as a supplementary position, typically comprising not more than 10–20% of the equity portfolio. The allocation should reflect an investor’s risk tolerance and investment horizon, he said.

In the last one year, small cap funds delivered an average return of 12.13% with TRUSTMF Small Cap Fund delivering the highest return of around 28.95%. In the last three years and five years the small cap funds delivered an average return of 15.61% and 15.16% respectively.

So what are the parameters on which investors assess whether their existing smallcap fund still has room to perform from here and could the strong six-month performance be followed by a period of consolidation or higher volatility?

Minocha said investors should review a fund’s performance over five years and compare it with its benchmark and peers. They should also assess portfolio quality, valuation, management strategy and risk-adjusted returns.

After a strong rally, investors should expect periods of slower growth or increased volatility. A correction or consolidation may occur, but this does not necessarily alter the long-term outlook for smallcaps, Minocha said. Investors can leave the judgement of whether to be overweight in large, mid or small caps to flexi-cap or multi-cap funds, he added.

Naik said investors in small-cap funds should be prepared to experience high volatility, as this is a natural feature of these funds and those who are not comfortable with high volatility are better off avoiding them.

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He further said that past performance over the last six months should not be the deciding factor when choosing a fund. Instead, fund selection should be based on an assessment of long-term performance consistency, risk, and, more importantly, comfort with the investment team and their investment approach.

(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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