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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:
- Nippon’s corpus has grown sixfold since 2020.
- Bandhan’s net assets jumped from Rs 800 crore in 2020 to over Rs 17,300 crore today.
These numbers matter because small-cap stocks are illiquid. They don’t trade in huge volumes. If a fund with Rs 20,000 crore tries to buy too much of a small-cap stock, two bad things can happen:
- The price shoots up, making it expensive.
- If the fund later wants to exit and there’s no one to buy, it can crash the price.
To avoid disturbing stock prices, and to remain flexible, some of the large small-cap funds like Nippon and Bandhan spread their money across several stocks, instead of making giant bets on a few.
Moreover, five of the seven most concentrated small-cap funds (least amount of stock holdings) are less than three years old. This shows that smaller funds can afford to take concentrated bets because they have a lower corpus to invest; giant funds cannot.
Now that we understand why large small-cap funds can be forced to have seemingly oversized portfolios, let us understand how Nippon and Bandhan schemes have used this to their advantage.
1. Their portfolios may be large, but not top-heavy
A typical small-cap fund parks about 25 per cent of its portfolio in just the top 10 stocks.
That means a quarter of stock decides whether the fund shines or stumbles.
But these two large-sized funds are built very differently:
- Nippon’s top 10 holds just a 14 per cent weightage in the total portfolio
- Bandhan’s top 10: Just 18 per cent
This means no single stock has an oversized influence on performance. Gains come from dozens of contributors, not one hero. And equally important, one bad call cannot derail the portfolio.
The design is deliberate. A broad base of small, distributed bets that keeps the engine running no matter which individual stock is having a bad day.
2. Strength in small-cap numbers
In small-caps, the return pattern is brutally uneven: a tiny fraction of companies generate a disproportionate share of the gains. The challenge, of course, is that identifying these future stars before they break out is almost impossible. That’s where concentrated portfolios run into trouble. By narrowing their bets, they also narrow their chances of catching enough of these winners.
Nippon and Bandhan take a different route. Their breadth is a blessing (perhaps in disguise). Instead of trying to predict the next one or two champions, they position themselves to benefit from the dozens of small, unexpected winners that emerge every year in the small-cap universe. This diffuse structure matches the reality of the segment.
By ensuring no single holding accounts for more than 3-4 per cent of the portfolio, they also dilute the impact of mistakes.
3. The last five years rewarded breadth, not concentration
In the post-Covid years, small-caps didn’t just outperform, they exploded, rising more than 40 per cent compared with the Nifty 50 TRI. Multiple waves of domestic inflows fuelled rallies across the depth of the market rather than just the familiar top 50 names.
Crucially, wealth creation happened in not just the 50 largest small-cap companies but across the small-cap universe. Companies that rarely make headlines quietly delivered outsized gains. Funds like Nippon and Bandhan, with their wide portfolios, were structurally positioned to catch far more of these emerging winners. They ended up capturing more multibaggers, simply because their net was cast wider. For instance, Bandhan alone has picked at least 17 stocks that went to grow more than three times in at least 24 months, while Nippon India’s scheme has had at least 50 such multibaggers.
4. Nippon and Bandhan’s diversification edge
In fact, diversification can show up not just during a market downturn, but during rallies as well. This is captured through “upside capture”, which tells you how much of a rising market a fund is able to participate in. The average small-cap fund captured only about 78 per cent of an up-move in the last five years. Nippon captured around 90 per cent, and Bandhan almost the entire rise at roughly 98 per cent.
In other words, when the market went up 10 per cent in the last five years, these funds climbed 9 to 9.8 per cent, while the average peer struggled to keep pace.
The reason is straightforward: a fund with 200 stocks has far higher odds of holding more of the winners in any rally. When the market turns buoyant, dozens of holdings start contributing, not just a handful.
The last word
The period between 2020 and 2025 was perfect for broad portfolios:
- Hundreds of smaller companies re-rated
- The Indian economy accelerated
- Capex and manufacturing boomed
- Liquidity poured in from domestic investors
Which is why Nippon and Bandhan prove a counterintuitive truth. In small-caps, diversification isn’t just a hedge, it can be a performance engine.
For more such insights, keep reading Value Research.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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