The Bandhan Small Cap Fund has demonstrated impressive long-term growth, achieving an annualised return of 25.35% over the past three years. This figure substantially surpasses the small-cap category average of 16% for the same period. Despite this strong historical performance, the fund has recently shown signs of underperformance, trailing its peers over the last three months, six months, and one year.
Understanding Recent Performance Trends
In the most recent three-month period, the Bandhan Small Cap Fund returned 6.71%, falling short of the category average of 8.80%. Similarly, its six-month return stood at 13.61% compared to the category's 15.92%. Over a one-year horizon, the fund gained 8.05%, slightly below the category average of 8.60%. These short-term dips raise questions for investors accustomed to its robust longer-term results.
Launched on February 25, 2020, the fund boasts a 28.64% CAGR since its inception and holds strong ratings—five stars from Value Research and four stars from Morningstar. Its five-year annualised return of 18.08% also comfortably exceeds the category average of 15.48%, reinforcing its long-term consistency.
Volatility and Performance Drivers
Investing in small-cap funds inherently comes with volatility, and the Bandhan Small Cap Fund's yearly returns reflect this. It saw significant gains of 52.45% in 2021, followed by a decline of 6.13% in 2022. It then surged again with 53.60% in 2023 and 43.12% in 2024, before a minor dip of 1.13% in 2025.
Experts attribute the fund's historical outperformance primarily to its adept stock selection, which contributed 13.05% to returns. In contrast, sector allocation had a negligible negative impact. Financial services emerged as the largest contributor to performance, adding 6.83%, supported by a nearly 20% portfolio allocation to the sector.
Portfolio Insights and Allocation
As of June 2026, the Bandhan Small Cap Fund managed assets totaling Rs 28,466 crore. Its portfolio was heavily weighted towards equities at 91.82%, with 72.34% in small-cap stocks, 13.25% in mid-caps, and 6.12% in large-cap companies. The fund maintains a significant overweight position in the finance sector (13.30% compared to the category's 8.12%), as well as in banks, realty, IT, FMCG, textiles, and iron and steel. Conversely, it is underweight in healthcare and capital goods.
Recent portfolio adjustments indicate active management, with 15 new stock purchases, nine exits, increased allocation in 83 stocks, and reduced exposure in 39 others.
Should Investors Be Concerned?
Financial experts advise investors against using past returns as the sole basis for investment decisions. Instead, a comprehensive assessment should include factors like risk tolerance, investment horizon, market-cap allocation, and personal financial goals. For existing investors engaged in Systematic Investment Plans (SIPs), continuing these investments can help mitigate market volatility.
Investors considering fresh lump-sum investments might benefit from staggering their contributions over four to six weeks rather than deploying the entire amount at once. The recent underperformance does not necessarily signal a fundamental flaw in the fund's long-term strategy. It is crucial for investors to monitor whether the fund's stock-selection advantage continues to translate into sustained outperformance over the medium to long term.
Ultimately, for a small-cap fund, indicators such as three-year and five-year consistency, risk-adjusted returns, and changes in portfolio strategy offer more meaningful insights than short-term fluctuations alone.