MF Tracker: ITI Small Cap Fund delivers 25% returns, tops 3-year chart. Should you book profits now?

ITI Small Cap Fund emerged as the top performer over the past three years, delivering an impressive 25.19% return 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.

Launched on February 17, 2020, the scheme has been awarded a four-star rating by both Value Research and Morningstar.


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Based on trailing returns, the fund has outperformed both its category average and benchmark across all the periods considered. In the last three months, the fund delivered a return of 15.36%, compared with 9.95% for the benchmark and 11.44% for the category average.

Over the last six months, the fund delivered a return of 25.49%, compared with 15.78% for the benchmark and 17.91% for the category average. Over the last year, the fund gained 20.13%, versus 8.46% for the benchmark and 13.05% for the category average.

Over the last three years, the fund delivered a return of 25.19%, compared with 17.92% for the benchmark and 17.23% for the category average. Over the last five years, it posted a gain of 18.67%, compared with 17.51% for the benchmark and 18.67% for the category average. Since inception, the fund has delivered a CAGR of 20.83%.

Based on yearly returns since 2021, the scheme lost 4.35% in 2022 and 3.98% in 2025. It delivered returns of 31.97%, 51.93% and 33.98% in 2021, 2023 and 2024, respectively. We considered yearly returns from 2021 because the scheme was launched in February 2020, and the 2020 return would not provide a meaningful picture of its annual performance.

Among smallcap funds, the scheme has neither delivered the highest annual return nor suffered the steepest decline in any given year.

What experts say: Time to book profits or continue SIPs?

Protima Dhawan, Director & Unit Head, Anand Rathi Wealth Limited, analysed the fund’s performance and told ETMutualFunds that investors should not book profits merely because trailing returns are strong. Existing investors can continue SIPs in small-cap schemes if their investment goal is at least seven years away, they can tolerate sharp volatility and their smallcap allocation remains within the planned portfolio limit.

SIPs are particularly useful in this category, Dhawan said, as they reduce the need to time short-term corrections.

Dhawan further said profit-booking is more appropriate when it is part of portfolio rebalancing.

For example, if an investor intended to keep 22% of their equity portfolio in small caps but a strong rally has pushed the allocation to 29%, the excess seven percentage points can be shifted to underweight asset classes. This restores the desired risk level without making an all-or-nothing call on the fund. Tax implications and the applicable exit load should also be checked before any redemption.

SIP and lumpsum performance

A monthly SIP of Rs 10,000 made in the fund since its inception would be worth Rs 16.84 lakh, with an XIRR of 23.44%. Over the last three years, the same monthly SIP investment would be worth Rs 4.77 lakh, with an XIRR of 19.53%. Over the last five years, it would have grown to Rs 10.46 lakh, with an XIRR of 22.59%.

A lumpsum investment made at the fund’s inception would be worth Rs 3.42 lakh, with a CAGR of 20.81%. A lumpsum investment made three years ago would be worth Rs 1.94 lakh, with a CAGR of 24.76%. The same investment made five years ago would be worth Rs 2.34 lakh, with a CAGR of 18.55%.

ITI Small Cap Fund: What drove the outperformance, and can it sustain?

Dhawan said ITI Small Cap Fund’s outperformance has been driven primarily by stock selection rather than broad sector calls. Between August 22, 2023, and August 21, 2026, the fund generated a cumulative return of 96.33%, compared with 58.46% for the Nifty Smallcap 250 Index. The attribution report assigns 42.72 percentage points of active return to security selection, while sector allocation detracted 2.30 percentage points. The outperformance, therefore, came largely from identifying individual businesses that materially outperformed their sector peers.

“Basic materials added 13.11 percentage points of active return, led by Acutaas Chemicals, Welspun Corp and Solar Industries,. Industrials added 11.05 points, supported by Kirloskar Oil Engines, Apar Industries and Bharat Dynamics. Technology added 6.89 points, with PG Electroplast among the largest contributors. Consumer cyclicals added 5.89 points, with Arvind and Eternal contributing positively.”

Investors should not extrapolate a 25% CAGR into the next three to five years, Dhawan said, as funds can also face mean-reversion challenges. “Our earnings estimates for the Nifty Smallcap 250 are supportive, at 20% growth in FY27 and 18% in FY28, but returns will also depend on valuation multiples and continued alpha,” she added.

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Key risk ratios in 3 years

Over the last three years, the scheme recorded a Treynor ratio of 1.85, alpha of 0.54, and Sortino ratio of 0.59. Return due to net selectivity stood at 0.50, while return due to improper diversification was 0.03.

The fund follows a growth-oriented small-cap strategy. As of July 2026, it held 80 stocks across 23 sectors, with an AUM of Rs 3,454 crore.

Smallcap valuations

According to the JioBlackRock Mutual Fund, small caps have corrected more sharply but remain near the upper end of their historical range relative to large caps. The BSE Smallcap Index-to-Nifty 50 ratio has recently broken above a long-term trendline, signalling a potential shift in relative performance.

Dhawan said small-cap valuations appear broadly fair. As of July 29, 2026, the Nifty Smallcap 250 was about 15.1% below estimated fair value, based on a P/E of 27.5 times and one-year forward EPS of 769. However, she cautioned that index-level valuations do not mean every stock is attractively valued.

ITI Small Cap Fund’s own portfolio valuation premium reinforces the need for selectivity. Rather than chasing recent returns, investors should ideally keep their combined allocation to mid- and small-cap funds within 45% of the equity portfolio, Dhawan said.

The fund had 63.20% in small caps, 23.54% in mid caps, 8.91% in large caps and 4.35% in other categories. Healthcare was its largest sector allocation at 15.13%, followed by capital goods at 13.27%.

What to track beyond returns

Apart from ITI Small Cap Fund, 22 small-cap funds have completed five years. Bank of India Small Cap Fund delivered the second-highest five-year return at 20.10%, while Nippon India Small Cap Fund returned 20.08%. Kotak Small Cap Fund delivered the lowest return at 13.62%.

Dhawan said investors should look beyond recent returns and track consistent alpha, downside risk, drawdowns and recovery time, AUM and flows, portfolio liquidity, fund manager experience, concentration, sector exposure, and valuation discipline.

The medium-term outlook remains constructive, with Nifty Smallcap 250 earnings growth estimated at 20% in FY27 and 18% in FY28. However, investors should allocate across market caps based on their risk appetite, investment horizon, and financial goals, Dhawan said.

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

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