MF Tracker: TRUSTMF Small Cap Fund topped one-year return chart with 22.77% gains. Can the rally continue?

TRUSTMF Small Cap Fund emerged as the top-performing equity mutual fund over the past one year, delivering a return of 22.78%, according to an analysis by ETMutualFunds. The analysis covered nearly 286 equity mutual funds during the period, excluding sectoral and thematic funds.

Launched on November 4, 2024, the smallcap fund is currently unrated by both Value Research and Morningstar. One reason for the absence of a Value Research rating is that the agency does not assign ratings to equity or hybrid funds with less than three years of performance history.

Among the smallcap category, 30 funds have completed at least one year of performance history. With a one-year return of 22.78%, TRUSTMF Small Cap Fund not only topped the category but also outperformed both its benchmark and the category average during the period.


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How does the CIO see the performance of the fund?

Mihir Vora: The fund has significantly outperformed the benchmark and peer group in the past year and since inception. We have consistently followed our investment philosophy of “growth at reasonable valuations” and the “Terminal Value” approach.

“We believe that earnings growth ultimately drives stock prices, and we attempt to capture this growth through our investment approach. This makes the portfolio tilt towards significantly higher growth stocks and sectors.”

Vora further said that We pick stocks with a bottom-up approach and manage the portfolio risk with controls on stock and sector exposure and stock picking in capital goods, CDMO, auto ancillaries, new-age companies, renewables, defence, capital markets and chemical segments have contributed to the outperformance.

TrustMF Small Cap Fund performance

The fund has outperformed its category average and benchmark across different horizons. In the last three months the fund delivered a return of 31.13% compared to 24.14% by the benchmark (Nifty Smallcap 250 - TRI) and 24.25% as the category average.

In the last six months, the fund delivered a return of 19.89% against 7.66% by the benchmark and 10.57% as the category average. The fund posted a gain of 22.78% in the last one year against 0.15% by the benchmark and 6.05% as the category average. Since its inception, the fund has delivered a CAGR of 18.99%.

How does an expert decode performance?

Bharath Rathore, Executive Director at Anand Rathi Wealth, told ETMutualFunds that while small cap funds have benefited from a supportive market over the past year, TRUSTMF Small Cap Fund's outperformance over both its benchmark and category average highlights strong stock selection and active fund management.

In the last year, the fund has generated an alpha of 22.5% over its benchmark, and a significant part of this performance came from stock selection across sectors such as infrastructure, materials, industrials and consumer cyclical businesses, the expert said.

Rathore further said that the broader smallcap segment also benefited from attractive valuations after the correction in 2025, healthy earnings expectations for FY27 and FY28, and continued support from domestic investors through SIPs and mutual fund inflows.

If an investor invested Rs 10,000 through a monthly SIP, the current value would have been Rs 2.22 lakh now with an XIRR of 22.69%. A lumpsum investment of Rs 1 lakh would have been Rs 1.27 lakh now with a CAGR of 15.67%.

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Similar returns over next few years?

The expert said that investors should understand that the best performing fund in one year will not necessarily remain at the top every year and mutual fund performance is cyclical, particularly in the smallcap space where market leadership changes over time.

“Return expectations should therefore be moderated, not because the long term opportunity in smallcaps has weakened, but because maintaining the same level of outperformance year after year is difficult. Investors should focus more on consistency across market cycles than on annual performance rankings,” he further said.

At the time of launch of this small cap fund, the fund house said that this fund will offer investors a chance to participate in the early growth stages of companies with the potential for substantial long-term wealth creation, according to a release by the fund house.

Sandeep Bagla, Chief Executive Officer at Trust Mutual Fund said at the time of launch that We focus on finding growth at reasonable valuations through our terminal value investing approach. Our new small-cap fund is designed to capture the high-growth phase of a company’s lifecycle, where the potential for returns can be most promising.

Being a small cap fund, the fund holds 1.83% in large caps, 22.34% in mid caps, 67.76% in small caps, and 8.06% in others. In comparison to the small cap category, the fund is overweight on mid caps and others.

Among all smallcap funds, the fund had the third lowest exposure in large caps and had nearly 67.76% in small caps.

It has the highest allocation in healthcare of around 16.87%, followed by 10.62% in finance.

Time to pick small caps?

Rathore firmly said that yes, smallcap funds deserve a place in the long term portfolios, but the decision to invest today should depend more on the investor's existing allocation than on current market conditions. A well balanced equity portfolio can have around 55% in large caps, 23% in mid caps and up to 22% in smallcaps, with overall smallcap exposure ideally remaining not more than 25%.

He further said that investors who are already significantly overweight in smallcaps should consider gradually rebalancing instead of adding more, and allocation decisions should be driven by portfolio strategy rather than short-term market movements, and SIPs should continue through market cycles.

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According to a market outlook by another fund house, the valuation premium of small caps vs large caps has meaningfully corrected; it has come down to ~18.3% in May 2026 from a high of ~21% in June 2025.

The PE and PBV ratio of the small cap fund were recorded at 64.44 times and 10.64 times, respectively, whereas the dividend yield ratio was recorded at 0.33 times as of May 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 1.19 and an alpha of 1.09. The sortino ratio of the scheme was recorded at 0.32.

The return due to net selectivity was recorded at 1.09, and return due to improper diversification was recorded at 0.002 in the last three years.

Should one invest or be cautious after valuations?

The expert said that valuations in the smallcap segment continue to remain attractive despite the recent rally, and the Nifty Smallcap 250 Index still has a negative froth level of around 15.6%, suggesting that valuations are not stretched and continue to offer meaningful upside potential.

He further said that investors should review their existing portfolio allocation and ensure that smallcaps do not exceed around 25% of their overall equity portfolio, and rather than trying to time the market, investing through SIPs is an ideal way to build exposure while managing market volatility.

How did other small caps perform?

Around 30 small cap funds completed one year of existence in the industry, and post TrustMF Small Cap Fund delivering the highest returns, Union Small Cap Fund delivered the second highest return of 15.72% in the last one year. Tata Small Cap Fund lost the most, around 7.02% in the last one year.

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Rathore said that the outlook for small caps remains positive, supported by attractive valuations and healthy earnings growth expectations for FY27 and FY28, and the Nifty Smallcap 250 Index continues to trade at a negative froth level of around 15.6%, indicating meaningful long-term upside potential.

However, the smallcap universe is vast and highly diverse, making fund selection critical. Hence, investors should choose experienced active fund managers and approach this category with a long-term investment horizon rather than focusing on short-term market movements, he further said.

(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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