Four 4-star small-cap funds have had a bad 2025. Now what?

Summary: Four stars, poor year. Should you still stay invested in these small-cap favourites? (Psst, Nippon India Small Cap is one of the strugglers…)

Equity funds can be fickle. And those who rate them, like us, can sometimes look silly.

Take small-cap funds, for instance. Value Research has awarded four stars to six of them. But in 2025, four of those six have had a rough ride. The worst hit? Tata Small Cap Fund, down nearly 6 per cent this year alone. Even the category heavyweight, Nippon India Small Cap Fund, hasn’t been spared. It’s down 2.1 per cent, though it still managed to fall a tad less than the Nifty Smallcap 250 TRI, which has slipped 2.7 per cent so far this year.

Here’s a roundup of hw the four four-star funds have fared so far this year:

But do these red numbers make them bad funds? Absolutely not.

How Value Research Ratings work

Our star ratings aren’t based on short-term blips or one bad year.

They’re a quantitative measure of a fund’s long-term, risk-adjusted performance compared with peers. In simple words, the rating combines a) returns delivered and b) risk taken to deliver those returns. This gives a risk-adjusted return score.

A five-star fund ranks among the top 10 per cent of its category, while a four-star fund sits just below that, in the next 22.5 per cent.

For equity and hybrid funds, we blend three-year and five-year performance, giving more weight (60 per cent) to the longer time frame. So, when you see a four- or five-star rating, it reflects the fund’s long-term consistency, not its latest quarter.

But remember: a rating is a starting point, not a final verdict. Your goals, time horizon and comfort with volatility matter just as much.

Why do these struggling funds still have a high rating?

Just to reiterate, when you see a four- or five-star rating, it reflects the fund’s long-term consistency, not its latest quarter.

Which is why we should look at how these four funds have performed in the last five years, from October 28, 2020, to October 28, 2025.

All funds outperformed the small-cap index’s 29.1 per cent annualised return. That’s why they’re rated highly, even if 2025 hasn’t been their year (so far).

Checking for consistency

Now, let’s move beyond point-to-point returns.

Rolling returns show how a fund performs over every possible period of a specific duration (say, five years), not just from one start and end date. It’s a much fairer way to judge consistency, because it smooths out the luck of timing.

So, we checked every five-year return between October 28, 2020 and October 28, 2025 for funds with at least 10 years of data: Nippon India and Franklin India.

• Nippon India Small Cap: Averaged 25.9 per cent annualised returns versus 18.6 per cent for the Nifty small-cap index, and beat it 100 per cent of the time. In other words, Nippon India’s fund always gave better five-year returns than the small-cap index over the last five years. That’s remarkable consistency.

In fact, the fund’s five-year returns were over 20 per cent on more than seven out of 10 occasions.

• Franklin India Smaller Companies: Averaged 19.5 per cent returns, beating the index 73 per cent of the time.

What about Tata and Edelweiss small-cap funds?

The other two — Tata and Edelweiss Small Cap Funds — are newer, without a 10-year record. So, we looked at calendar-year performance instead.

• Tata Small Cap Fund (launched in November 2018) beat its benchmark four out of six years.
• Edelweiss Small Cap Fund (launched February 2019) did so five out of six times since 2020.

And when it comes to volatility — measured by standard deviation (SD) — both have been calmer than their peers and the benchmark. (In simple terms, standard deviation shows how much a fund’s returns fluctuate. The lower it is, the steadier the ride.)

• Tata: SD of 16.05 per cent
• Edelweiss: SD of 15.9 per cent
• Category average: 17.05 per cent
• Index: 18.9 per cent

Our take

While the four four-star funds have had an unflattering 2025 so far, you cannot judge any equity fund based on one-year performance. It’s even truer in the case of small-cap funds, where we suggest that the minimum holding period should be at least seven years. If your time horizon doesn’t match that, we suggest you look at other equity and hybrid funds.

What about the five-star small-cap funds?

Curious to see how the top-rated small-cap funds are doing? Head over to this page to explore all the schemes that currently hold a perfect five-star rating. You can also check their short- and long-term point-to-point performance to see how they’ve fared in different market cycles.

And if you want to dig deeper into their rolling returns — a far truer measure of long-term consistency than plain point-to-point data — it’s all available to Value Research Fund Advisor subscribers.

Check out Fund Advisor today

Also read: One small-cap fund just earned a four-star rating from us