Small-cap funds outperform as AUM limits big fund agility — SkimNews
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- Nippon India Small Cap Fund reported a -1.40% one-year return as of 23 October 2026 despite its ₹80,906 crore AUM, the largest in the category.
- SBI Small Cap Fund, with ₹41,059 crore AUM, posted a -2.33% one-year return, underperforming smaller schemes in the same segment.
- LIC MF Small Cap Fund, managing ₹841 crore, delivered a 5.64% one-year return, while Bank of India Small Cap Fund with ₹3,671 crore returned 16.71%, the highest in the category.
- Vedant Gupte explained that large funds face liquidity constraints in small-cap stocks, forcing them to spread investments, drift toward larger companies, and hold more cash, diluting returns.
- Ajay Kumar Yadav illustrated how a large fund like Nippon would need over 800 trading sessions to buy a 2% portfolio stake in a low-volume stock, versus about 9 for LIC, increasing purchase costs and reducing alpha.
- Eshaan Lazarus cited an IIM Kozhikode paper from March 2026 showing a stronger negative link between fund size and risk-adjusted returns in small-cap funds, as larger funds shift to more liquid, lower-alpha stocks.
- Gupte noted that strong performance erodes a small fund’s advantage by attracting inflows, increasing AUM, and eventually replicating the liquidity challenges of larger peers.
Why it matters: Smaller small-cap funds can generate higher returns by accessing illiquid, high-potential stocks that larger funds cannot trade efficiently, meaning investors may benefit from lower AUM schemes despite their lesser prominence. This shifts focus from brand size to portfolio agility and liquidity management as key return drivers.
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