India’s small-cap mutual fund category went through a sharp reality check in calendar year 2025, emerging as one of the clear underperformers among diversified equity categories. After years of strong gains, valuation excesses corrected meaningfully, triggering steep decline in 2025. The Nifty Smallcap 100 index declined 7% in 2025, reflecting the severity of the correction.
Among small-cap funds, Quantum Small Cap Fund emerged as the category leader, delivering a positive return of 1.81% and standing out as the only fund to end in the green. It was followed by Sundaram Small Cap, HDFC Small Cap, PGIM India Small Cap and ICICI Prudential Smallcap Fund, all of which posted negative returns ranging between -1.56% and -1.88%.
In contrast to the volatility seen in small-cap mutual funds, bank fixed deposits (FDs) continue to offer better stability and predictability, albeit with lower return potential. In 2025, most large banks offered FD interest rates in the range of 6% to 7.5%, providing assured returns and capital protection.
While FDs shield investors from market swings, they often struggle to beat inflation over extended periods. In essence, bank FDs serve as a safety anchor in a portfolio, while small-cap mutual funds is riskier.
Long term Small-cap funds offer strong returns
However, while short-term returns disappointed, long-term performance told a very different story. Several well-managed small-cap funds continued to deliver exceptionally strong five-year compounded annual growth rates (CAGR), highlighting the importance of patience, disciplined investing, and superior stock selection in this volatile segment.
Despite negative or muted returns in 2025, the five-year CAGR of top-performing small-cap funds ranged between 25% and 31%, significantly outperforming the Nifty Smallcap 250 TRI, which posted a one-year return of around -6.91% and a five-year CAGR of roughly 22.0% to 26.6%, depending on the reference date in late 2025.
Below are the top five performing small-cap mutual funds (Direct Plans) based on five-year CAGR, with each reflecting a different investment style and risk approach.
Top small-cap mutual funds by 5-year CAGR
Quant Small Cap Fund: The fund remained the category leader over the long term with a five-year CAGR of over 30%. Its aggressive, high-conviction strategy amplified volatility in 2025 but rewarded investors handsomely over longer cycles.
Nippon India Small Cap Fund: It delivered a five-year CAGR of around 28% underlining strong execution across market cycles.
Bandhan Small Cap Fund: Long-term investors continued to benefit from a solid five-year CAGR of over 27%.
Invesco India Smallcap Fund: Over five years, it delivered a CAGR of over 27%, aided by disciplined risk management and a competitive expense ratio of about 0.40%.
Edelweiss Small Cap Fund: Its five-year CAGR of around 26% reflects a balanced approach to growth and risk control, making it one of the steadier performers in the category.
Understanding small-cap funds: risk and reward
Small-cap mutual funds invest in companies with market capitalisation below ₹5,000 crore, typically outside the top 250 listed firms. These businesses are often early in their growth cycle and relatively unknown, which creates opportunities for outsized returns — but also exposes investors to high volatility and sharp drawdowns in the short to medium term.
The key advantages of small-cap funds include early exposure to potential future leaders and higher long-term return potential. However, they are best suited for very aggressive investors with a minimum investment horizon of seven years or more, who can withstand interim corrections like the one seen in 2025.
The lesson from 2025 is clear: while small-cap investing can be unforgiving in the short term, quality fund selection and time in the market remain the biggest drivers of long-term wealth creation.
