Small caps: Where active funds pull ahead

Summary: In the latest small-cap crash, active funds fell nearly half as much as the index. Luck or something more? The data across every major correction tells a clear story. Here’s a data point for you to chew on: In the market decline that began in September 2024, over 80 per cent of active small-cap funds held up better than the small-cap index by simply falling less. The Nifty Smallcap 250 index was still 10 per cent down as of mid-February. The average small-cap fund was down much less at 5.8 per cent.  This naturally calls for revisiting an old, popular dilemma: when you invest in small caps, does picking an active fund get you better outcomes than owning the index? Data shows that more often than not, you do. Most small-cap funds beat the index over long term Prior to 2018, small-cap funds could freely invest anywhere in the market to maintain outperformance. So, we analysed five-year rolling returns from 2018 onward after SEBI categorisation clearly defined the category’s investing mandate.  What we found: Ninety-one per cent of active small-cap funds delivered higher average five-year rolling returns than the Nifty Smallcap 250. The average outperformance of these funds was a handsome 4.1 per cent per annum. In large caps, by comparison, only about half the funds managed to outperform, and that too, by a slimmer 1.9 percentage points on