India’s small-cap funds are attracting massive investor interest despite softening returns. Fresh data reveals these funds bought stocks worth Rs 30,000 crore between April and October 2025. This represents a 58% increase compared to the same period last year. The surge comes even as average returns dropped to just 3% over one year.
Small-cap investing remains the most debated corner of the market. It is also widely misunderstood by retail investors. New analysis from Ventura Securities using AMFI and ACE MF data shows these funds are more structured than assumed. They maintain careful diversification and liquidity buffers that many investors overlook.
Juzer Gabajiwala of Ventura Securities explains the reality behind small-cap funds. Contrary to popular belief, they don’t focus on obscure or ultra-small companies. The data reveals a much more balanced approach to portfolio construction.
Recent portfolio analysis shows surprising allocations. 83% of small-cap fund holdings are in stocks ranked 1-750 by market capitalization. True small-cap positions between ranks 251-750 account for 63% of portfolios. Nearly 20% is actually parked in large and mid-cap stocks.
These funds maintain 7% in cash as liquidity buffers. This careful balancing act makes small-cap funds more stable than their reputation suggests. They blend liquidity, quality and growth considerations systematically.
What qualifies as small cap today might surprise investors. The 251st company in India boasts a market cap of Rs 30,400 crore. Even the 750th company represents a substantial Rs 4,900 crore business. These are hardly tiny enterprises by any measure.
Many current small caps were yesterday’s mid-caps or large caps. This reflects India’s dramatic market capitalization expansion over the past decade. The small cap universe has grown significantly in scale and quality.
Several household names actually fall under small cap classification. CDSL, Gillette, and NBCC all qualify as small caps. Angel One and PNB Housing Finance join this group too.
East India Hotels, Wockhardt, and Tata Chemicals round out the surprising list. These are companies most investors would casually label as mid-caps. The classification system creates unexpected categorizations.
A massive perception mismatch exists about small cap definitions. Retail investors often see Rs 25,000 crore companies as mid-caps. Mutual funds classify them as small caps in their official categorization.
When retail investors mention small caps, they typically mean Rs 1,000 crore companies. AMCs classify those as micro-caps that most funds avoid. Both audiences use the same term for entirely different universes.
Despite valuation concerns and RBI warnings, money keeps flowing. The 58% inflow surge contrasts sharply with weakened performance. Investors appear focused on long-term potential rather than short-term returns.
Gabajiwala explains why small caps remain attractive. They offer the widest sector spread across the market. Their long-term alpha potential exceeds other categories despite short-term volatility.
Fund managers maintain liquidity buffers to avoid distress selling. Historical data shows small caps tend to outperform over extended horizons. Patience becomes the key differentiator for successful investing.
Ventura Securities recommends specific guidelines for small cap investors. Maintain a minimum five-year investment horizon to weather volatility. Avoid timing the category and focus on portfolio quality instead.
Don’t confuse small caps with micro caps that carry higher liquidity risks. Track fundamental quality rather than market hype when selecting funds. With proper expectations, small caps can deliver meaningful wealth creation over time.