Smallcap funds pare core exposure as market valuation worries remain

Allocation to smallcap basket declines from 76.4% a year ago to 74.4%

The exposure of smallcap funds dedicated to ‘smallcap’ stocks has come down over the past one year as the broader market valuations remain elevated.

 

The average allocation to ‘smallcaps’ for top 10 schemes by size — which stood at 76.4 per cent in October 2024 — is down to 74.4 per cent this October.

 

Smallcap schemes are mandated to invest at least 65 per cent of their corpus in smallcap stocks.

 

The rest can be invested in largecaps, midcaps and debt instruments. However, there are some schemes which invest only in smallcap stocks.

 

The allocation across market cap (mcap) segments is largely driven by the relative attractiveness of each bucket, according to experts.

 

Smallcap indices are more expensive currently than they were last year, going by the 12-month trailing price-to-earnings (P/E) ratio.

 

As of October 31, 2025, the PE ratio of Nifty Smallcap 250 was at 32.2 against 30.2 in the same time last year. This is despite the index registering a 2.5 per cent decline in the one-year period.

 

“Indian markets have underperformed global markets considerably making it a contrarian option. Valuations are not cheap but have moderated from the peaks. Midcap and Smallcap valuations continue to remain high,” ICICI Prudential MF said in its latest equity outlook.

 

While index-level valuations have risen, fund managers and market experts, in recent months, have pointed out that the price and time correction after September 2024 helped remove the froth that had built up in certain pockets.

According to Utsav Mehta, fund manager – equity, PGIM India Mutual Fund, the changes in allocation are also a result of other factors.

 

“This is because the Association of Mutual Funds in India (Amfi) released a revised list of companies by market capitalisation (semi-annual exercise) where some of the portfolio holdings got reclassified from smallcap to midcap. Many of our holdings have seen a strong stock price performance and got elevated to midcap. Thus, despite no material changes to holdings, the smallcap allocation has fallen optically,” he said. 

 

The latest mcap-wise exposure data shared by fund houses shows that the 27 schemes in the smallcap category had average largecap exposure of 5.7 per cent in October 2025. This compares to 4.6 per cent in the same month last year.

 

The midcap exposure has gone up from 12.3 per cent to 14.9 per cent in the same period.

 

Smallcap schemes of Bank of India MF, PGIM India MF and Union MF have witnessed the sharpest decline (over 10 percentage points) in their smallcap exposure.