Should you invest in a small-cap fund that falls the least?

Summary: Small-cap funds shine in bull runs, and break hearts in crashes. But what if the smarter choice isn’t the one that rises highest, but the one that falls the least? Using downside capture ratios, we identify India’s most resilient small-cap funds and uncover a counter-intuitive insight.

Small-cap funds are a mercurial beast. In bull markets, they sprint ahead, delivering returns that look almost unreal. But when markets turn volatile, they are often the first to crack, and they can crack hard. And this is precisely where most investors trip up.

The problem with small-cap investing isn’t just volatility. It’s investor behaviour.

We all love small-cap funds during good times. Flashy returns make them look irresistible. But when markets fall sharply, as they periodically do (check this story), small-cap portfolios tend to fall faster, fear sets in and many investors panic-sell at exactly the wrong time. Often, this happens because the fund’s volatility was never aligned with the investor’s real risk-taking capacity or market experience.

That’s why, paradoxically, one of the most useful lenses to evaluate small-cap funds isn’t how much they make during booms, but how much they protect during busts.

Measuring the damage: What is the downside capture ratio?

To identify funds that hold up better when markets fall, we use a metric called the downside capture ratio.

Simply put, this tells us how much a fund falls when the market falls.

• A downside capture of 100 per cent means the fund falls exactly as much as the market.
• A ratio below 100 means the fund falls less than the market.
• The lower the number, the better the downside protection.

For example, Axis Small Cap Fund has a downside capture of 63 per cent. This means that whenever the small-cap benchmark fell 10 per cent over the last five years, the fund fell only about 6.3 per cent. SBI Small Cap Fund, with a downside capture of 69 per cent, fell around 6.9 per cent when the market dropped 10 per cent between December 2020 and December 2025.

Using this ratio, here are the 10 most resilient small-cap funds:

So far, so good. These funds look tough-as-nails when markets turn ugly.

But resilience raises a natural question.

Do resilient small-cap funds also deliver strong returns?

Between December 8, 2020 and December 8, 2025, the answer appears… underwhelming.

Here’s what the data shows:

• Of the 10 small-cap funds that fell the least, only three—Invesco India, Nippon India and HDFC Small Cap—were top-quartile performers.
• In half, five of the 10 landed in the bottom half of the category.
• Over this period, the average small-cap fund delivered 23.84 per cent annualised returns, and only four of these resilient funds managed to beat that average.

Here’s how they stacked up:

At first glance, this makes resilient funds look uninspiring.

But there’s a catch.

Why point-to-point returns can mislead

All the returns above are calculated between just two dates, between December 8, 2020 and December 8, 2025.

That’s a single snapshot. And snapshots can lie.

Good or bad luck at the start or end date can heavily distort the picture. To fix this, we turn to rolling returns.

Instead of looking at one five-year period, rolling returns calculate five-year annualised returns for every possible starting day over the period.

Instead of checking returns for just one five-year period, we looked at every possible five-year window between December 8, 2020 and December 8, 2025. Basically, this approach removes the impact of lucky or unlucky timing and shows how consistently a fund has performed over time.

And once we looked at the rolling returns, the story flipped:

• All 10 resilient small-cap funds beat the average small-cap fund’s five-year annualised return of 18.8 per cent.
• Seven of the 10 funds outperformed the category average more often than not.
• For six funds, rolling five-year returns beat the average small-cap fund over 75 per cent of the time. Below is the table that suggests how many times the 10 resilient small-cap funds have beaten the average one:

In other words, while a single timeframe made these funds look mediocre, a longer, fairer lens shows that resilience does pay off.

The other side of the coin: Upside capture ratio

This brings us to the upside capture.

Upside capture ratio tells us how much of the market’s gains a fund captures when markets rise. An upside capture of 100 per cent means the fund rises in line with the market. Lower numbers mean it captures a smaller portion of bull-market gains.

For instance, Axis Small Cap Fund has an upside capture of 57 per cent. When the market rises 10 per cent, it captures only about 5.7 per cent of that gain. SBI Small Cap Fund is similar, which explains why both lagged sharply during strong bull phases. That said, despite the lower upside ratios, both these funds outgunned the average small-cap scheme at least 75 per cent of the time in the last five years.

And that is a trade-off worth making.

Funds that fall less when markets turn turbulent make it far easier for investors to stay invested through the cycle. By reducing the chances of panic-selling during downturns, resilient funds give compounding the uninterrupted time it needs to work. In small-cap investing, staying invested matters far more than catching every rally, and most of these steadier funds quietly help investors do just that.

So, should you invest in one of these small-cap funds?

That depends on how much volatility you can truly stomach and how disciplined you are during market downturns. This is exactly where Value Research Fund Advisor helps. It goes beyond past returns to assess risk, downside protection, consistency and suitability, helping you choose small-cap funds that fit your temperament. Because in small-cap investing, the right fund matters far more than the hottest one.

Explore Value Research Fund Advisor today

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