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Summary:This top-performing small-cap fund is doing things very differently. Its performance has surprised even seasoned investors, given the unconventional approach it follows. So, what’s behind this fund’s standout success?
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In a category where success is often credited to high-conviction, tightly managed portfolios, the Bandhan Small Cap Fund defies convention because it has 185 stocks in its portfolio.
You read that right. 185.
Yet, despite the seemingly bloated portfolio, Bandhan’s small-cap scheme continues to rank consistently among the top-performing funds in its category.
This approach stands in stark contrast to the widely held belief that small-cap outperformance demands a concentrated strategy.
Among the 30 small-cap equity schemes, the average fund holds about 86 stocks. The Nippon India Small Cap Fund is the only other fund that holds more stocks (237) in its portfolio.
Long-tail portfolio
The fund’s performance sparks a provocative question: Can a long-tail portfolio where most stock allocations are under 1 per cent still deliver sustainable alpha?
While critics might question the feasibility of tracking such a broad portfolio in a volatile segment like small caps, Manish Gunwani, Head of Equities at Bandhan Mutual Fund, counters that the size of the investable universe makes a compelling case for diversification.
“For example, in a large-cap fund, if the fund has 50 stocks while the universe is more or less 100 stocks, that’s not seen as a dramatic choice (numerically-heavy portfolio). Similarly, for us, because we cover 500-odd stocks, having 150 small caps, to me, is a filtration of about one in three,” he says.
Scalability is also a strategic driver. With assets under management crossing Rs 11,000 crore, Gunwani is keenly aware of the challenges of deploying fresh inflows in a relatively illiquid segment without distorting the portfolio’s integrity.
“In small caps, it’s very difficult to make a clean exit from a stock zero and then start buying a new stock. But I think we should be fair to the new investor who is giving us new money,” explains Gunwani.
Track record
The results speak for themselves. Over the last one year, the fund has delivered a 13 per cent return, dramatically outperforming the small-cap category average of 2.5 per cent, and currently ranks as the second-best fund among 42 peers. Its longer-term record is equally compelling, with three- and five-year returns of 36.6 per cent and 38.3 per cent respectively—well above the category benchmarks.
At a time when concentrated portfolios are seen as the only way to win in small caps, Bandhan’s broad-based strategy is proving that a well-constructed long tail can also deliver enduring alpha.
Also read: Why has Motilal Oswal's flexi-cap fund been flying high?
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