Small caps had a tough year. This fund made 20%. How?

Summary: A small-cap fund returned 20 per cent last year. The category averaged 6. The benchmark returned 3. A gap that wide isn't luck. But it does raise a question every outperforming fund eventually has to answer.

TRUSTMF Small Cap Fund returned nearly 20 per cent last year. The small-cap category averaged around 6 per cent. The BSE 250 Smallcap TRI, the benchmark, returned 3.19 per cent.

That gap is wide enough to ask: What exactly went right for the fund?

What drove TRUSTMF Small Cap Fund's outperformance

The outperformance was not a product of lucky bets or concentrated positions. It came from a consistent tilt toward high-growth businesses at a time when the market was rewarding one thing above everything else: earnings visibility, the confidence that a company's profits will keep growing predictably.

The fund's portfolio targets earnings growth of 25-30 per cent annually, well ahead of roughly 13 per cent for large caps and 19-20 per cent for the small-cap benchmark. That growth differential did the heavy lifting.

Gains were broad-based across sectors. Capital goods and construction delivered strongly. Consumer discretionary, capital-market-linked businesses and select NBFCs (non-banking financial companies) added meaningfully. Stock picking in pharmaceuticals and auto ancillaries contributed too. The outperformance came from company selection, not just top-down macro calls.

The GARV approach

At the heart of the fund's approach is GARV, growth at reasonable valuations. In plain terms: identify businesses with high long-term growth potential, but buy them only when the price reflects that value, not before.

The concept is familiar. The execution has a distinctive twist.

Most funds anchor valuations to two to three-year earnings estimates. TRUST Mutual Fund places significant weight on what analysts call terminal value, the value a business generates well beyond the near-term forecast window, sometimes decades out.

Mihir Vora, CIO at TRUST Mutual Fund, explains the logic: "For companies with long growth runways, a large portion, often 70-80 per cent of the valuation, comes from earnings generated well beyond the next five to eight years."

In practice, this shifts the investment question. Instead of asking whether a company can grow over the next two years, the fund asks how large the opportunity is, how defensible the competitive position is and how long the growth can last. It is a longer, harder question. It also narrows the field considerably.

Portfolio strategy: What the fund bets on and what it avoids

The fund deliberately avoids energy and utilities, sectors where earnings are hostage to commodity cycles and regulatory decisions outside any company's control. The bias is toward businesses with secular, structural growth: NBFCs, capital-market plays, premium consumption and online retail.

Even within these, the positioning has been active. Financial exposure was increased after valuation corrections made entry points more attractive. Within technology, exposure was trimmed when the risk from AI disruption looked elevated, then selectively rebuilt after sharp corrections in mid- and small-cap IT names that retained genuine growth potential.

The fund's edge is identifying inflection themes early—renewables, digital platforms, evolving consumption patterns—and holding with conviction long enough for the thesis to play out.

Is the outperformance repeatable?

A 20 per cent return in a year when the benchmark managed 3 per cent is a strong result. It also raises the question every outperforming fund eventually faces.

The GARV framework and long-duration valuation approach are genuine differentiators, not a one-year style bet. But growth-oriented small-cap funds tend to outperform when earnings visibility is rewarded and underperform when markets rotate toward value or defensives. The process is consistent. The environment isn't always.

Knowing whether a fund like this belongs in your portfolio, and how much of it to hold, depends on more than one strong year. Value Research Fund Advisor tells you exactly which funds to keep, which to drop and what to buy next.

For investors already in the fund, the consistency of the process matters more than any single year's return. For those considering it, the more useful question is not whether the fund beat its benchmark last year. It is whether the investment philosophy makes sense for the next five.

Evaluate the GARV approach over a five-year horizon, not a single strong year.

Also read: 252% return in 1 year. But new investors can't invest. Why?