Small-cap funds outperform as AUM limits big fund returns — SkimNews
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- Nippon India Small Cap Fund reported a one-year return of -1.40% as of 23 October 2026, despite being the category’s largest scheme with ₹80,906 crore in AUM.
- SBI Small Cap Fund, with ₹41,059 crore in AUM, posted a one-year return of -2.33%, underperforming smaller peers in the same category.
- 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 segment.
- Vedant Gupte explained that large funds struggle to deploy capital in small, illiquid stocks without moving prices, leading them to hold more cash or drift toward larger-cap holdings.
- 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 MF, due to liquidity constraints.
- 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.
- Gupte noted that strong performance often leads small funds to grow, eventually eroding their edge as they face the same liquidity limits as larger peers.
Why it matters: Smaller small-cap funds can generate higher returns by accessing niche, illiquid opportunities that larger funds cannot trade efficiently, meaning investors may benefit from prioritizing fund size and liquidity metrics over brand recognition when selecting schemes. This shifts the advantage from scale to agility in a segment where market depth is limited.
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