Small-cap funds gave 5x returns in 10 yrs. A new normal?

Summary: Everyone’s chasing small-cap funds after their 5x run in the last decade. But our deep dive shows that sky-high returns are far from the norm. Instead of just looking at averages, we broke past returns into splits, showing how often they actually fell into buckets like 0–5 per cent, 10–15 per cent or above 20 per cent. The result? A reality check that may surprise you and change the way you think about small-cap investing.

If you had invested Rs 10 lakh in an average small-cap fund 10 years ago, today you’d be sitting on nearly Rs 50 lakh. That’s a fivefold leap. Even a middle-of-the-pack small-cap fund has delivered around 17.3 per cent annualised over the last decade, as of September 4, 2025.

It’s no surprise then that small caps are the new darling of retail investors. I recently watched a prominent influencer advising a 28-year-old on financial planning. Out came the SIP calculator, in went the magic number—18 per cent annualised—and in seconds, a Rs 3,500 SIP ballooned into multiple crores over 30 years. The investor’s eyes widened in disbelief.

Sure, the influencer wasn’t “wrong”. Past data support the possibility of 18 per cent returns. The question is: how often does that really happen? And more importantly, should you expect it in the future?

Why point-to-point returns can fool us

Most people quote mutual fund performance with a simple formula: “X fund delivered Y per cent in Z years”. This is called point-to-point returns. It’s simple, but dangerously incomplete.

Here’s why. Imagine two friends investing in the same small-cap fund. One starts in January 2014, the other in January 2015. Ten years later, their returns can look quite different depending on when they began. Point-to-point returns hide this variability.

This is where rolling returns come in.

Rolling returns explained

Think of rolling returns as checking every possible entry point. Instead of cherry-picking one start date and one end date, rolling returns say:

• “What if you had invested in February 2014 and redeemed in February 2024?”
• “What if you started in March 2014 and exited in March 2024?”
• …and so on, for every single day in between.

You essentially roll forward the investment window across time and measure outcomes.

Here’s an everyday analogy: Say you want to know how crowded a popular restaurant is. If you only check on a Sunday night, you might conclude it’s always full. But if you drop by at random times all week, you’ll get a more accurate picture. Rolling returns do exactly that for investments. It shows you the full range of experiences, not just the best (or worst) snapshot.

What the numbers say about small caps

So, I crunched the numbers for the Nifty Smallcap 250 TRI, the benchmark for most small-cap funds, using 10-year daily rolling returns over the last decade.

Here’s what I found:

• Never gave negative returns over any 10-year period.
• Most common outcome (39.5%): Between 10–15 per cent annualised returns.
• Exactly 18 per cent or higher: Only 12 per cent of the time (roughly 1 in 8 periods).
• 0–10 per cent outcomes: About 20 per cent of the time.

So yes, 18 per cent returns did happen. But far more often, the index delivered 10–15 per cent. In fact, there was a greater chance of earning single-digit returns than 18 per cent returns.

Why expecting the moon on a stick can backfire

This is where investor psychology gets interesting. If you walk in expecting 18–20 per cent and end up with, say, 9 per cent over 10 years (which was a real outcome about one-fifth of the time), you’ll feel pretty disappointed.

And let’s be honest: most investors won’t even stay invested for 10 years if returns are so low for an extended period. So, when we shrank the window to five years, and the picture turns bumpier:

• 30 per cent chance of either negative or single-digit returns.
• 40 per cent chance of 18 per cent or higher.

Essentially, over the last decade, your chances of earning 18 per cent annualised returns from a small-cap fund over any five-year stretch were just four in 10. Given this, when investors walk in expecting such sky-high returns, disappointment becomes inevitable. Many exit in frustration, branding the market as little more than gambling and often swear never to return.

So, what’s a fair expectation?

While the last 10 years were exceptional, assuming small-cap funds will keep compounding your money at 18 per cent annually is unfair.

A more reasonable expectation is 12–15 per cent annualised returns.

That may sound like a big climbdown, but let’s see what it means in practice:

• Lumpsum example: Rs 10 lakh invested for 20 years at 12 per cent grows to Rs 96.5 lakh.
• SIP example: Rs 10,000 monthly SIP at 12 per cent for 20 years builds Rs 92 lakh.
• Stretch either to 30 years, and you’re comfortably in the Rs 3 crore territory.

You don’t need sky-high returns for compounding to make you wealthy. You just need realistic expectations and the patience to stay invested.

Bottom line

Small-cap funds have delivered an outstanding 5x over the last decade. But don’t let that seduce you into believing 18 per cent a year is the new normal. Rolling returns show it happened only rarely, and more often, returns clustered between 10–15 per cent.

So, go in expecting 12–15 per cent. That way, you won’t abandon ship when the market tests your patience, and you’ll still walk away wealthier than most. In investing, boring expectations often lead to exciting outcomes.

Want to know which small-cap funds you should invest in?

That’s where Value Research Fund Advisor comes in. Instead of chasing unrealistic promises, our research helps you identify the right small-cap funds that balance growth potential with consistency. With carefully curated recommendations, regular updates, and clear guidance, Fund Advisor makes sure your investments stay on track—through bull runs and market slumps alike.

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Also read: A look at this small-cap fund that beat its benchmark by 10%