 "India's 'small caps' no longer small: Funds buy stocks worth Rs 30,000 cr")
Small-cap investing is usually the most debated corner of the market—and also the most misunderstood. New data from AMFI and ACE MF (as of October 2025) analysed by Ventura Securities revealed that India’s small-cap funds are far more structured, diversified, and liquidity-conscious than retail investors assume. And even though returns have softened sharply over the past year, investor inflows continue to surge.
Juzer Gabajiwala of Ventura Securities explains what small caps really look like today—and why retail perceptions often clash with fund reality:
1. Small-Cap Funds Aren’t Tiny Stock Thrillers—They’re Big, Balanced Portfolios
Contrary to popular belief, small-cap mutual funds don’t bet on obscure or ultra-small companies.
Fresh portfolio data shows:
- 83% of small-cap fund holdings are in stocks ranked 1–750 by market cap
- 63% lie in the true small-cap zone: ranks 251–750
- Nearly 20% is actually parked in large and mid-cap stocks (top 250 companies)
- 7% sits in cash as a liquidity buffer
- This means that small-cap funds are not wild micro-cap rides—they are carefully blended portfolios balancing liquidity, quality and growth.
2. What counts as a Small Cap Today? Much Bigger Than Retail Investors Think
As of June 2025:
- The 251st company in India is worth Rs 30,400 crore
- The 750th company is still a sizable Rs 4,900 crore
- These are hardly “tiny” companies.
- In fact, many of today’s small caps were yesterday’s mid-caps or even large caps.
This reflects how dramatically market capitalization has expanded in India over the past decade.
3. The Big Shock: Many Well-Known Brands Are Actually Small Caps
Fund managers classify several household names as small caps—despite their strong brand recall and robust business models.
This includes:
- CDSL
- Gillette
- NBCC
- Angel One
- PNB Housing Finance
- East India Hotels
- Wockhardt
- Tata Chemicals
These are companies most investors would casually label as mid-caps or even large-caps. But in AMC classification, they are officially small caps.
Why Retail Investors Misjudge the Category
- There’s a massive perception mismatch about what “small-cap” even means.
- Retail investors often see a Rs 25,000 crore company as a mid-cap.
- Mutual funds classify it as a small cap.
On the other hand:
- When retail investors say “small cap,” they often mean a Rs 1,000 crore company.
- AMCs classify that as micro-cap—a zone most small-cap funds avoid due to liquidity risks.
- So, both audiences talk about "small caps," but refer to entirely different universes.
5. The Big Twist: Small-Cap Returns Have Fallen—But Flows Are Exploding
Despite the growing caution around valuations, global macro uncertainties and RBI’s warnings earlier this year, investors continue to pour money into small-cap funds.
Performance (1-year as of Oct 2025)
3% average return → significantly lower than large and mid-cap categories
But investor flows tell a different story:
Rs 30,555 crore flowed into small-cap funds between April–Oct 2025 Versus Rs 19,358 crore in the same period last year
That's a 58% surge in inflows, even though performance has weakened.
6. Why Investors Still Love Small Caps
Gabajiwala says:
- Small caps have the widest sector spread
- They offer the highest long-term alpha potential
- They’re volatile in the short term but reward patience
- Fund managers maintain liquidity buffers to avoid distress selling
- Over long horizons, small caps tend to outperform all other categories
In simple words:
Short-term pain, long-term gain—if you stay the course.
7. What Investors Should Keep in Mind
Small caps demand discipline and a long runway. Ventura Securities recommends:
- Minimum 5-year investment horizon
- Expect heavy short-term volatility
- Avoid timing the category
- Don’t confuse small caps with micro caps
- Track fund portfolio quality, not hype
- Small caps can be meaningful wealth creators—but only when matched with correct expectations.