Revealed: 5 small-cap mutual funds with least damage in this market crash

Investors should limit their allocation to small-cap funds to 20-25 per cent of their portfolio.

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The past few months have been challenging for Indian markets, with sharp declines across various indices. Since the peak on September 26, 2024, the Sensex has dropped by 11.3%, while mid-cap stocks (as represented by the BSE 150 Midcap TRI) have tumbled by 17.8%. However, the most significant losses have been seen in small-cap stocks, with the BSE 250 Smallcap TRI sinking by 21.3%, dragging down many small-cap-focused funds in the process.

 

The correction in the market, largely attributed to foreign investor outflows, has been a test for many funds. While some funds have held up better than others, the situation has exposed which ones have the resilience to withstand such volatility and which are more vulnerable to market downturns.

 

The Hardest-Hit Small-Cap Funds

Among the most affected small-cap funds, several have seen significant losses, reflecting the tough market conditions. Value Research decoded the five hardest-hit small-cap funds, as of February 20, 2025, based on point-to-point returns since September 26, 2024:

 

Bank of India Small Cap Fund

Return: -19.08%

Assets Under Management (AUM): Rs 1,556 crore

 

Kotak Small Cap Fund

Return: -19.68%

AUM: Rs16,450 crore

 

Quant Small Cap Fund

Return: -19.91%

AUM: Rs 25,183 crore

 

Aditya Birla Sun Life Small Cap Fund

Return: -20.35%

AUM: Rs 4,585 crore

 

Mahindra Manulife Small Cap Fund

Return: -21.65%

AUM: Rs 3,541 crore

 

These funds, which had a significant focus on small-cap stocks, have taken the brunt of the market’s volatility. The steep declines in returns are a direct result of the broader market correction, especially in small-cap stocks, which tend to be more vulnerable to market fluctuations. 

This market correction serves as a reminder of the inherent volatility of small-cap funds, which tend to experience larger fluctuations in the short term. While small-cap stocks can offer the potential for higher returns, they also come with deeper drawdowns, particularly during market corrections.

 

For investors, the key takeaway is the importance of managing risk when allocating to small-cap funds. Experts at Value Research recommend limiting exposure to small-cap stocks to about 20-25% of a portfolio and maintaining a long-term investment horizon of at least 7-10 years. This long-term perspective can help investors weather the ups and downs of the market and reduce the impact of short-term volatility.

 

As the market continues to recover and stabilize, it’s crucial for investors to assess their portfolios and ensure they’re prepared for more swings in the coming months.

 

The Most Resilient Small-Cap Funds

While many small-cap funds struggled during this correction, a few managed to outperform and show greater resilience in the face of market turmoil. Value Research decoded  the five small-cap funds that held up the best during this period: