MF Tracker: Bank of India Small Cap Fund tops equity funds with 25.21% returns in 7 years. Can the run continue?

Bank of India Small Cap Fund has offered the highest CAGR of around 25.21% over the last seven years, based on daily rolling returns, among all equity funds excluding sectoral and thematic funds, an analysis by ETMutualFunds showed. There were around 163 funds in the period, of which this small-cap fund offered the highest return.

A further analysis of the data showed that the other funds on the list that have completed seven years of existence delivered returns ranging from 9.14% to 22.97%, based on daily rolling returns.

Launched on December 19, 2018, this small-cap fund has been given a four-star rating by both Value Research and Morningstar.


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Since its inception, the fund has delivered a CAGR of 25.66%. On the basis of trailing returns, the fund has managed to outperform its benchmark and category average across various horizons.

In the last three months, the fund offered a return of 15.65% against 10.53% by the benchmark (Nifty Smallcap 250 - TRI) and 12.94% as the category average. In the last six months, the fund offered a return of 38.84% against 20.10% by the benchmark and 24.48% as the category average.

The fund posted a gain of 25.88% compared to 7.91% by the benchmark and 13% as the category average. The fund gave 19.65% in the last three years, compared to 14.34% by the benchmark and 14.65% as the category average. The fund gave 18.67% in the last five years against 15.64% by the benchmark and 15.75% as the category average.

How did an expert decode the performance?

Subhendu Harichandan, Executive Director, Anand Rathi Wealth Limited, analysed the performance and shared with ETMutualFunds that if we look at Bank of India Small Cap Fund’s performance over the last few years, the outperformance seems to have come more from broad diversification and consistency rather than taking concentrated bets in a particular sector or a few stocks.

The portfolio is spread across more than 30 sectors, with no single sector having a huge allocation, while the largest individual holding is around 3% of the portfolio. This means the fund is not dependent on a handful of stocks to drive its returns and has been able to participate across different pockets of the smallcap rally, including electrical equipment, auto ancillaries, pharmaceuticals and financials, Harichandan further said.

Performance on other parameters

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 offered its highest return in 2021, at around 70.83%. Among all the small-cap funds, the fund has not offered the highest return in any calendar year, nor has it lost the most in these calendar years.

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Can this fund sustain its performance amid high small-cap valuations?

Harichandan said that while looking at the annual performance, with the fund delivering positive returns in 2020 and 2021 and then negative returns in 2022, the seven-year performance has not been consistent but has been driven by strong upswings in a few years. Going ahead, such cyclicality in performance can be expected, and the fund’s performance will also depend on the market outlook.

He also said that if we look at earnings growth, the Nifty Smallcap 250 is expected to grow by around 27% in FY27 and 33% in FY28, which gives some support to the segment even after the strong rally we have seen. At the same time, investors should remember that small caps are inherently more volatile than large caps and, hence, ups and downs are a normal part of small-cap investing.

“Thus, the recent strong outperformance of the fund should not be expected to continue at the same pace every year. The fund can continue to do well if the fund manager is able to identify the right stocks and the earnings growth comes through, but investors should also be prepared for downturns along the way,” the expert said.

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

According to the monthly outlook by a fund house, valuations present a mixed picture, with large caps offering a more balanced risk-reward profile, while parts of the mid- and small-cap universe continue to trade at elevated valuations.

Being a small-cap fund, the fund holds 2.36% in large caps, 7.16% in mid caps, 17.40% in others and 73.08% in small caps. Compared with the small-cap category, the fund is overweight on others.

The fund had the highest allocation in capital goods, at around 11.43%, followed by 10.99% in banks, 10.27% in healthcare and 8.73% in automobiles & ancillaries.

According to the latest AMFI data, small-cap funds received the highest inflows of Rs 7,973 crore, marking the highest-ever inflow in the category. In July, the small-cap category received an inflow of Rs 7,767 crore, marking a 3% jump month-on-month.

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Small-cap valuations and rising investor inflows: Is the segment at risk of overcrowding?

Harichandan said small caps have rallied around 25% this FY, while small-cap funds have also seen record inflows in recent months, with nearly Rs 8,000 crore flowing into the category in August.

“If we look at valuations, we see that the index is trading around 13% below its estimated fair value, which shows that over the long term, further upside is still possible. However, it is important for investors to ensure they are not falling prey to recency bias and investing in small caps only because of their recent performance.”

The expert further said allocation decisions should be based on a long-term strategy rather than chasing past returns. If the allocation to small caps has risen above the intended level in a portfolio, investors can rebalance to bring it back in line with their strategy.

Risk ratio parameters of the fund

The PE and PBV ratios of the fund stood at 53.52 times and 8.65 times, respectively, while the dividend yield stood at 0.40% as of March 2026.

ETMutualFunds analysed the other key ratios of the fund over a three-year period. Based on the last three years, the scheme has delivered a Treynor ratio of 1.60 and an alpha of 0.39. The Sortino ratio stood at 0.49.

The return due to net selectivity was 0.32, while the return due to improper diversification was 0.06 over the last three years.

Around 22 small-cap funds have completed five years of existence in the market, excluding Bank of India Small Cap Fund. Of these, Invesco India Small Cap Fund delivered the highest return of around 18.80% based on trailing returns.

Nippon India Small Cap Fund, the largest small-cap fund based on assets under management, delivered a 18.25% CAGR over the last five years. Kotak Small Cap Fund delivered the lowest return over the period, at around 11.77%.

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What allocation to have in small caps and way ahead?

The expert said the long-term outlook for small caps is positive, supported by expected earnings growth over the next few years. At the same time, investors need to remember that small caps can go through periods of sharp ups and downs.

“Over the last 20 years, the Nifty Smallcap 250 has seen an average drawdown of around 22%, with most corrections lasting around three to four months and markets generally recovering their previous peaks within 12 to 18 months.

Hence, the main takeaway is that investors should not change their allocation based on short-term market movements or the recent rally. They should maintain a balanced exposure of around 55% in large caps, 23% in mid caps and 22% in small caps to capture stability as well as growth potential,” the expert further said.

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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