MF Tracker: Bank of India Small Cap Fund tops 5-year returns. Should you chase the winner?

Bank of India Small Cap Fund has offered the highest CAGR of around 30.83% in the last five years based on daily rolling returns, an analysis by ETMutualFunds showed. There were around 338 funds in the said period of which the fund offered the highest return.

A further analysis of the data showed that the fund delivered the second highest of around 23.05% among 288 funds who have completed seven years of existence in the market based on daily rolling returns.

Launched on December 19, 2018, this small cap fund is given three star rating by Value Research and four star rating by Morningstar both.


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Since its inception, the fund has delivered a CAGR of 23.82%. On the basis of trailing returns, the fund has managed to outperform its benchmark and category except for the returns delivered in the last three years which were at par with the benchmark and over the category average.

In the last three months, the fund offered a return of 16.86% against 7.28% by the benchmark (Nifty Smallcap 250 - TRI) and 7.84% as the category average. In the last six months, the fund offered a return of 3.13% against a loss of 4.50% by the benchmark and a loss of 2.40% as the category average.

What does the fund house say on performance of the fund?

Alok Singh, CIO : Bank of India Small Cap Fund has delivered relatively consistent performance over the period of time. The fund’s performance has been driven by disciplined stock selection and a clear focus on business fundamentals. We invest in small-cap companies with scalable business models, improving earnings visibility, sound balance sheets, and credible management teams.

The fund follows an active portfolio management with a focus on valuation discipline and diversification across sectors. This has enabled us to navigate the inherent volatility in the small-cap space. Importantly, the fund has benefited from India’s structural growth themes such as manufacturing, formalization, and domestic consumption, which continue to create opportunities for well‑run emerging companies. Our approach remains centered on long‑term compounding while carefully managing risks across market cycles.

How an expert decode the performance?

The fund has achieved this performance due to favorable market conditions and effective management, its strong performance is driven by significant exposure to the Capital Goods, Industrials, Basic Materials, and Chemicals sectors, supported by strategic stock selection and these sectors benefitted from India’s infrastructure initiatives and the post-2020 manufacturing revival, Anshi Shrivastava, Head - Personal Finance Trainer & Qualified Financial Advisor, 1 Finance shared with ETMutualFunds.

“However, many stocks have already undergone sharp valuation re-ratings and now trade at premium levels. As post-pandemic support fades and competition in the small-cap market grows, earnings growth may slow.”

Shrivastava further said that since 2020, the Indian small-cap market has also been influenced by economic formalization, increased retail participation, improved corporate governance, and strong earnings and the Bank of India Small-Cap Fund has successfully identified promising businesses early and maintained a low turnover rate, allowing it to gain significantly from growth stocks.

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Performance on other parameters

The fund posted a return of 8.85% in the last one year compared to 3.73% by the benchmark and 6.35% as the category average. In the last three years, the fund delivered a return of 22.02% which was at par with 22.11% by the benchmark and outperformed 19.50% as the category average. The fund posted a return of 20.76% in the last five years against a return of 19.38% by the benchmark and 19.42% as the category average.

Based on the annual returns for the last eight years (as the fund was launched in 2018), the fund gave negative returns in 2022 and 2025. The fund lost 1.62% in 2022 and 8.49% in 2025. In the last eight calendar years, the fund has offered the highest return in 2021 of around 70.83%. Among all the small cap funds, the fund has not offered the highest return in any calendar year, nor lost the most in these calendar years.

How sustainable are these high rolling returns?

Shrivastava said that it is crucial to approach the sustainability of such elevated rolling returns in the small-cap sector with caution, and as inflows increase following strong performance, deploying significant amounts into less liquid small-cap stocks can become challenging for the fund manager, potentially escalating market impact costs and limiting investment options.

“Additionally, the valuation re-ratings responsible for recent gains may not be replicated to the same extent in the future”

She further said that the top-performing funds often struggle to maintain their leading positions in subsequent periods, illustrating a tendency toward performance rotation and mean reversion, particularly within small- and mid-cap categories, it is important to understand that rolling returns measure average consistency across many overlapping periods, but the top-ranked fund in those averages still changes over time and this can happen because different market phases favour different investment styles.

The fund is managed by Alok Singh. The performance is benchmarked against Nifty Smallcap 250 - (TRI).

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Being a small cap fund, the fund holds 2.51% in large caps, 12.94% in mid caps, 5.94% in others, and 78.62% in small caps. In comparison to the small cap category, the fund is overweight on mid caps and small caps.

According to an equity view by Tata Mutual Fund, Nifty is now trading at a reasonable PE of 20x and with earnings growth of 15-17% visible next financial year which sets the tone for better equity returns in next 12-18 months, midcap and small cap premium has come down but risk reward and flows will still favor large caps more.

The report further said that the headline valuation premium for Nifty Smallcap 100 vs Nifty 50 has come down further to 12% by the end of March 2026 from the highs of nearly 21% in June 2025.

“Nifty Smallcap 100 1-year forward P/E remained at 19.8, higher than the long-term average of 16.9x. Valuations continue to remain expensive. Hence, while the index has corrected, valuations continue to remain expensive,” the report by Tata Mutual Fund further said.

Should one move to small cap funds?

Shrivastava said that currently, small-cap valuations remain above long-term historical averages, indicating a limited margin of safety and while this situation does not warrant completely avoiding small-cap investments, making lump-sum entries at these levels can carry a heightened risk of short-term corrections.

Risk ratio parameters of fund

The PE and PBV ratio of the multi asset allocation fund were recorded at 42.21 times and 7.18 times respectively whereas the dividend yield ratio was recorded at 0.99 times as of March 2026.

ETMutualFunds analysed the other key ratios of the fund in a three year period. Based on the last three years, the scheme has offered a Treynor ratio of 1.54 and an alpha of 0.02. The sortino ratio of the scheme was recorded at 0.45.

The return due to net selectivity was recorded at (0.04) and return due to improper diversification was recorded at 0.07 in the last three years.

Around 22 small cap funds have completed five years of existence in the market, of which Bandhan Small Cap Fund gave the highest return of around 23.47% based on trailing returns. This was followed by Nippon India Small Cap Fund which gave 22.86% CAGR in the last five years. Aditya Birla SL Small Cap Fund gave the lowest returns in the last five years of around 15.63%.

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What allocation to have in small caps and way ahead?

Shrivastava said that it's important to note that there is no universally applicable allocation percentage for small caps; individual circumstances, such as risk tolerance, age, investment goals, and existing portfolio composition, play significant roles and given that small-cap investments can decline by 40-60% during downturns, it is vital to commit only risk capital that can withstand such volatility.

She further said that the long-term outlook for Indian small-caps is likely to remain marked by volatility and potential for significant corrections, success in this arena is tied to goal-aligned, systematic investing rather than a focus on recent outperformers and regularly reviewing allocation strategies with a financial advisor is advisable, rather than making decisions based on performance rankings.

One should always consider risk appetite, investment horizon, and goals before making any investment decisions.

(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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