Equity markets have had a rough three months, with benchmark indices ending in the red. Yet small cap mutual funds bucked the trend.
According to Value Research data, small cap funds generated an average return of 11.82% over the last three months, making them the best-performing diversified equity mutual fund category during the period.
In comparison, the BSE Sensex declined 7.21%, while the Nifty 50 fell 5.64%.
Small cap funds outperformed other categories
Returns across major diversified equity categories varied sharply.
| Fund category | 3-Month Return | 1-Year Return | 3-Year CAGR | 5-Year CAGR |
|---|---|---|---|---|
| Small Cap | 11.82% | 2.36% | 18.26% | 16.66% |
| Mid Cap | 6.22% | 3.88% | 19.32% | 16.57% |
| Large & Mid Cap | 1.04% | -0.38% | 14.32% | 13.39% |
| Flexi Cap | 1.85% | -0.58% | 13.12% | 11.51% |
| Large Cap | -1.71% | -1.60% | 11.56% | 10.35% |
Source: Value Research
Large-cap funds posted negative returns during the period, while mid-cap funds delivered 6.22%. Small caps comfortably led the pack.
Why did small cap funds rally?
The category benefited from a strong performance in underlying stocks.
The Nifty Smallcap 250 TRI rose 10.58% over the last three months, far ahead of broader indices.
Several factors supported the rally.
Domestic demand remained resilient
Many smaller companies focused on the domestic market continued to report healthy growth. Infrastructure spending, capital expenditure and consumer demand supported earnings.
Valuations became more attractive
Small-cap stocks had corrected sharply before the rebound. Lower valuations encouraged fresh buying.
Sectoral tailwinds helped
The rally was concentrated in areas where smaller companies have a larger presence.
These included:
- Infrastructure
- Defence
- Media
- Other cyclical sectors
One-year returns tell a different story
The strong three-month performance does not fully reflect the category’s recent history.
Over the past year, small-cap funds have delivered an average return of 2.36%.
That is better than large-cap funds, which recorded negative returns, but below the 3.88% generated by mid-cap funds.
The figures suggest the category has staged a recovery after a difficult period.
Longer-term performance remains strong
Looking at longer periods, returns improve considerably.
Over three years:
- Mid-cap funds delivered a CAGR of 19.32%
- Small-cap funds generated 18.26%
Over five years:
- Small-cap funds returned 16.66%
- Mid-cap funds delivered 16.57%
The data indicates that investors who stayed invested through market cycles have been rewarded despite periods of volatility.
Top-performing small cap funds
Among direct plans, these schemes delivered the highest returns over the past three months:
| Fund | 3-Month Return |
|---|---|
| Bank of India Small Cap Fund | 23.74% |
| TRUSTMF Small Cap Fund | 21.28% |
| JM Small Cap Fund | 19.48% |
| Motilal Oswal Small Cap Fund | 18.25% |
| Quant Small Cap Fund | 17.54% |
Source: Value Research. Data as of June 5. Past performance is not indicative of future returns.
Risks remain high
The category also experienced sharp corrections earlier in 2025.
Concerns over valuations, election-related uncertainty and global economic headwinds triggered a sell-off. At various points, many actively managed small-cap funds suffered double-digit losses.
Small-cap stocks are generally more volatile than large-cap stocks. They can generate strong gains when market sentiment is favourable, but losses can be deeper when conditions turn adverse.
Liquidity constraints in the segment can amplify both rallies and declines.
What investors should keep in mind
Financial planners generally advise investors to consider:
- Risk appetite
- Investment horizon
- Overall asset allocation
Small-cap funds are typically suited to investors who can tolerate volatility and remain invested over the long term.
TL;DR
Small cap mutual funds delivered an average return of 11.82% over the last three months, outperforming all major equity fund categories despite declines in the Sensex and Nifty. However, the category remains highly volatile and witnessed sharp corrections earlier in 2025.
AI summary
- Small cap funds returned 11.82% in the last three months.
- The Sensex and Nifty declined during the same period.
- Domestic demand, lower valuations and sectoral rallies supported small-cap stocks.
- One-year returns remain modest at 2.36%.
- Small-cap funds carry higher volatility and risk.
