Smallcap funds delivered an average return of 8.20% in May. Out of the 30 funds in the smallcap category, three posted double-digit gains, while the remaining 27 generated single-digit returns during the month.
DSP Small Cap Fund offered the highest return of around 14.05% in May, followed by Quantum Small Cap Fund, which gave a 11.06% return in the same period. Motilal Oswal Small Cap Fund offered a return of 10.30% in a similar time frame.
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Bandhan Small Cap Fund gave an absolute return of 9.39% in the mentioned time period. Tata Small Cap Fund gave a 9.18% return in a similar time frame. Kotak Small Cap Fund and ICICI Pru Smallcap Fund offered 8.79% and 8.53% returns, respectively, in May.
Nippon India Small Cap Fund, the largest smallcap fund based on assets managed, gave a 7.39% return in the same period. Quant Small Cap Fund and SBI Small Cap Fund delivered the lowest return of around 6.21% and 5.88%, respectively, in a similar time frame.
With the category emerging as a top performer, experts believe interest in smallcap funds is reviving. Following a sharp, valuation-driven correction, smallcap stocks have rebounded amid improving market sentiment, economic optimism, and strong domestic inflows. “The phase of correction brought more rational valuation, which, along with earnings surprises and increased self-participation, gave attractive returns in May. Historically, small-caps have gained quick momentum following corrections, and this trend is now playing out again,” Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance, shared with ETMutualFunds.According to a release by Motilal Oswal Private Wealth, large-cap valuations are now around their 10-year average, while mid- and small-caps still trade at a premium, though select opportunities exist.
After seeing the valuations level, Minocha recommends that for small-cap funds, a “cautious approach” would go a long way and they should only constitute a small satellite portion of an investor’s portfolio, favourable for someone with a high-risk tolerance and an investment horizon of around 10–15 years and additionally, for most investors, the main chunk of their portfolios would go into sectors with a higher likelihood of stability, like flexi-cap, large & mid-cap, and multi-cap funds.
“In the present scenario, SIPs are seen as instruments to monitor volatility and facilitate rupee cost averaging. If investors have lump sums, it would be fairly sensible to disburse such amounts into small-cap funds via an STP over 6 to 12 months to lessen the impact of risk due to entry timing,” he further shared the strategy with ETMutualFunds.
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On the other hand, Deepak Shenoy, Founder, Capital Mind, told ETNow that overall, the rough situation is that the Nifty is down a little bit, but the mid and smallcaps seem to be in good shape, even the next 50 is.
Shenoy added, “We saw about 25,000 crores enter the markets as fresh entries into mutual funds in April and given that May was like a 9% plus month for smallcaps and smallcap funds have been the second largest recipient of funds in April, that will kind of bolster more retail investment into domestic funds even more. Given that, overall fund flows seem to be more concentrated towards domestic.”
In the last three months, smallcap funds offered an average return of 18.74%, with DSP Small Cap Fund being the topper, as the fund gave a 21.97% return in the last three months.
In the last six months, nine months, and the current calendar year so far, smallcap funds lost over 5% each. The smallcap funds dropped 5.51%, 5.69%, and 5.01% in the last six months, nine months, and the current calendar year so far, respectively.
Commenting on the outlook for smallcap funds, Minocha shared with ETMutualFunds that his view on smallcaps is cautiously optimistic, as they represent, essentially, the “big galaxy” of about 2300 companies listed on the NSE. Additionally, there is significant variation in fund performance across fund houses, making good fund selection important. Investors must consider the fund manager’s track record, investment style, and risk management ability.
“The fund’s capability to maintain liquidity and build a quality portfolio through market cycles. Once invested, staying disciplined and not reacting to short-term market movements is crucial to allow the fund manager to deal with volatility as it comes. If the investor is patient and has chosen well, a small-cap fund is a good tool for generating wealth over the long run, but it requires a strong stomach and a long-term view,” he further added.
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On the other hand, Shreyash Devalkar, Fund Manager at Axis Mutual Fund, told ETNow that when it comes to mid and small and this conundrum has been there for the last three years now, it is not today’s conundrum that largecap lacks growth while valuations are reasonable and midcap, smallcap the growths are better than the largecap but valuations have got elevated quarter after quarter.
“So, a 20 PE mid, small, great growth story, became 30, became 40 after every quarterly result season. Even in this quarter, the same thing broadly would have happened that initially largecap outperformed, but post the result season, many of the mid and smallcaps, because of the good earnings growth delivery, actually caught up post results,” he added.
We considered all smallcap funds in the said period. We considered regular and growth options. We calculated the performance from May 1, 2025, to May 31, 2025.
Smallcap schemes invest in relatively smaller companies, making them inherently high-risk investments. The segment is known for its short-term volatility but also holds the potential for substantial long-term gains. These schemes are best suited for aggressive investors with a high-risk appetite and a long investment horizon of seven to ten years. ETMutualFunds does not recommend smallcap schemes to new or inexperienced investors.
One should always consider their risk appetite, investment horizon and goals before making any investment decision.
(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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