Smallcap Funds Play Safe, Limit Bets Beyond Top 1,000 Stocks

Companies in the lower mcap deciles have recorded the fastest growth in median mcap.

Smallcap mutual funds (MFs) in India continue to maintain limited exposure to microcap stocks, with allocations beyond the 1,000th rank by market capitalisation (mcap) capped at around 2 per cent, according to a study by domestic brokerage Ventura.

The 32 schemes falling in the smallcap fund category have assets under management (AUM) of around Rs 3.7 trillion.

Ventura analysis indicates that nearly 83 per cent of smallcap fund portfolios are invested within the top 750 listed stocks by mcap.

The core smallcap segment -- stocks ranked between 251 and 750 --account for about 63 per cent of total portfolio allocation.

Stocks ranked 751-1,000 make up around 7 per cent, while nearly 20 per cent of portfolios are allocated to large and midcap stocks.

Around 6 per cent is held in cash and debt instruments for liquidity management.

Despite conservative portfolio positioning, the smallcap universe has expanded significantly over the past five years.

Companies in the lower mcap deciles have recorded the fastest growth in median mcap.

Valuations In Last 5 Years

Between June 2020 and June 2025, the stock that ranked 251st by mcap saw its valuation rise nearly 4.4 times, while the 500th and 750th ranked stocks grew around 6.1 times and 7.3 times, respectively.

In absolute terms, the 251st ranked stock's mcap rose to Rs 30,627 crore in June 2025 from Rs 6,936 crore in June 2020.

The 500th ranked stock increased to Rs 10,299 crore from Rs 1,695 crore, while the 750th ranked stock climbed to Rs 4,873 crore from Rs 666 crore over the same period.

The study highlights that smallcap funds provide access to several niche sectors that are largely absent from the large and midcap universe.

Sectors such as abrasives, business services, and media and entertainment are primarily represented by smallcap companies.

"Many stocks perceived as large or midcap are actually smallcap stocks for fund managers, according to Association of Mutual Funds in India (AMFI) classification," said Juzer Gabajiwala, director at Ventura.

Examples include CDSL, Gillette, NBCC, PNB Housing Finance, Wockhardt, East India Hotels, Angel One and Tata Chemicals.

Investor behaviour has also diverged from short-term performance trends.

Small Cap Funds Deliver Negative Returns

Between December 2024 and November 2025, smallcap funds delivered negative returns of around 2.4 per cent, yet the category recorded net inflows of Rs 53,165 crore during the period.

This suggests that investor flows are increasingly driven by long-term conviction rather than near-term market movements.

"By nature, smallcaps are volatile and at times risky. However, the category has evolved. Portfolio construction has become more disciplined, and the opportunity set continues to broaden," Gabajiwala said.

"Patience is key for portfolio investing, and to generate alpha, smallcaps need to be part of the portfolio," he added.

Feature Presentation: Aslam Hunani/Rediff