The 3 most improved small-cap funds of the last 5 years

We also give you the list of the top-performing small-cap funds between September 2015 and September 2020

The 3 most improved small-cap funds of the last 5 years Nitin Yadav/AI-Generated Image

Summary: Three funds that were near the bottom of the charts between 2015–2020 have turned into top-half performers, with one even becoming the No. 1 small-cap fund of the last five years. So, which funds have pulled off this dramatic turnaround? Let’s find out

If there’s one segment of the market that can make you feel like a genius one year and a fool the next, it’s small caps. These funds invest in some of the smallest listed companies, the ones with the most potential to grow but also the most prone to wild swings. That volatility is what scares many investors, but it’s also what creates the biggest wealth-building opportunities.

The last decade is proof. Between September 2015 and September 2020, small-cap funds gave rather unremarkable returns, mostly in single digits, with just a few funds standing out. But the last five years have been a completely different story. Several small-cap funds have turned into wealth-compounding machines, and a few have delivered stunning performance compared to their past track record.

Looking back: The 2015–2020 phase

Let’s rewind to the September 2015 to September 2020 period. Here’s how the then 13 small-cap funds ranked on five-year returns back then:

SBI Small Cap: 14.6 per cent (Rank 1)
Axis Small Cap: 12.1 per cent (Rank 2)
Nippon India Small Cap: 12.0 per cent (Rank 3)
Kotak Small Cap: 9.8 per cent (Rank 4)
HDFC Small Cap: 9.4 per cent (Rank 5)
DSP Small Cap: 8.0 per cent (Rank 6)
Union Small Cap: 6.3 per cent (Rank 7)
HSBC Small Cap: 6.2 per cent (Rank 8)
ICICI Pru Small Cap: 5.8 per cent (Rank 9)
Quant Small Cap: 5.2 per cent (Rank 10)
Franklin India Smaller Companies: 5.0 per cent (Rank 11)
ABSL Small Cap: 4.7 per cent (Rank 12)
Sundaram Small Cap: 3.5 per cent (Rank 13)

Note: Direct plans

Back then, Quant, HSBC and Franklin India’s schemes were middle-of-the-pack or even laggards. Few investors would have picked them expecting outperformance.

Fast-forward to 2020–2025

The three most improved funds of the last five years are:

1. Quant Small Cap Fund

2015-2020: 5.2 per cent (Rank 10/13)
2020-2025: 36.3 per cent (Rank 1/21)

This is arguably the most spectacular turnaround in the small-cap universe. Quant Small Cap, which was an underperformer in the 2015-2020 phase, has become the number one fund in the last five years.

Its aggressive, momentum-driven style of investing has worked brilliantly in a market where small caps have been on fire.

2. HSBC Small Cap Fund

2015-2020: 6.2 per cent (Rank 8/13)
2020-2025: 31.5 per cent (Rank 7/21)

HSBC Small Cap hasn’t just delivered higher returns, it has climbed the rankings too, moving from a bottom-half performer in 2015–2020 to a solid top-half contender over the last five years. In the last five years, the fund has managed to beat the small-cap index’s 29.6 per cent annualised returns.

3. Franklin India Small Cap Fund

2015-2020: 5 per cent (Rank 11/13)
2020-2025: 31 per cent (Rank 9/21)

This fund managed to wriggle itself out from the laggard list to a top-half performer in the last five years.

Investor takeaway

These three funds show that past performance isn’t destiny. A fund that was struggling five years ago can completely reinvent itself and deliver top-quartile returns.

But there’s a bigger lesson here: don’t chase yesterday’s winners blindly. The SBI and Axis small-cap funds, which were the best performers five years ago, have dropped sharply in the rankings. SBI’s scheme has been the second-worst performer in the last five years, while Axis’s scheme was ranked 17th among 21 active small-cap funds.

Instead, focus on:

Staying invested through cycles (don’t exit a fund after a bad year)
Diversifying across at least two small-cap funds to smooth out volatility if you have a large enough monthly SIP. If not, ignore this point.
It’s better to invest in small-cap funds through SIPs.