The 200-stock secret behind India's top small-cap funds

Summary: Too many stocks in a portfolio rarely inspires confidence. On paper, it can look like the fund is simply buying a large portion of the market rather than backing its convictions. Yet Nippon and Bandhan’s small-cap schemes are doing exactly that, and the results have been anything but diluted. Despite holding more than 200 stocks each, both funds have compounded investor wealth at over 30 per cent a year in the last five years. What appears oversized at first glance has, in reality, become a powerful advantage. Here’s why this unusually broad approach is working so well for their investors… An average actively managed small-cap fund today holds 89 stocks. In fact, 25 of 31 small-cap funds run portfolios with fewer than 100 stocks. But the average gets pulled up by two outliers, and interestingly, they are also among the best-performing small-cap funds of the last five years. Nippon India Small Cap: 237 stocks (2nd best performer) Bandhan Small Cap: 228 stocks (3rd best performer) Both have delivered over 30 per cent annualised returns in five years, beaten only by Quant Small Cap. At first glance, this seems odd. Theoretically, you’d think that small-cap funds prefer 50–100 high-conviction stocks, because these companies can move up or down sharply, whereas more stocks should mean less punch. So, why do these two funds have such a bloated portfolio in the first place? That’s because both funds have seen massive inflows: N