Why Bandhan Small Cap Fund Stands Out Among India’s Top Small Cap Funds

Choosing a small cap mutual fund is not easy.

Bandhan Small Cap Fund, Nippon India Small Cap Fund and Invesco India Smallcap Fund have all produced strong returns over different periods. SBI Small Cap Fund and HDFC Small Cap Fund have longer histories, while Quant Small Cap Fund has delivered periods of exceptional performance.

So, why should an investor consider Bandhan Small Cap Fund when several credible alternatives are available?

The answer is not that Bandhan wins every comparison. It does not.

Invesco has recently delivered a higher one-year return. Nippon has a much longer track record. Other older schemes provide more evidence of how their strategies work across different market cycles.

Bandhan’s case rests on something different. It has combined strong three-year and five-year returns with a diversified portfolio, competitive expenses and meaningful benchmark outperformance. However, its short history and rapidly growing assets under management remain important limitations.

Let us examine whether this combination makes Bandhan one of the stronger choices within the small cap category.

Why Small Cap Funds Offer High Return Potential and High Risk

Small cap companies are businesses ranked below the top 250 listed companies by market capitalisation.

Many of these businesses are still in the early stages of expansion. A successful small company can grow its revenue and profit much faster than an already established large company. That growth can eventually translate into significant wealth creation for shareholders. But the same characteristics that create this opportunity also create greater risk.

• Greater business risk: Small companies usually have fewer products, customers and sources of income. A loss of one important customer, a failed expansion or an increase in borrowing costs can affect their profits significantly. Large businesses are generally better placed to absorb such setbacks.
• Higher share-price volatility: Small cap stocks can rise quickly when investors become optimistic. They can also fall sharply when market sentiment weakens. Therefore, a small cap fund can experience much larger short-term gains and losses than a large cap or flexi cap fund.
• Lower liquidity: Liquidity refers to how easily a stock can be bought or sold without considerably affecting its price. Trading volumes in smaller companies are generally lower. If a large mutual fund needs to sell a sizeable holding during a market correction, it may not find enough buyers at the prevailing price. This becomes particularly important when a small cap fund has a very large AUM.
• Deeper drawdowns: A drawdown is the fall from an investment’s previous high to its subsequent low. If a fund rises from ₹100 to ₹150 and then falls to ₹105, its drawdown is 30%. The investor has not lost money compared with the original investment, but most of the previous gain has disappeared. Such declines are normal in small cap investing. This is why small cap funds are more suitable for investors who can tolerate sharp falls and remain invested for several years.

Why One-Year Returns Are a Bad Way to Choose a Small Cap Fund

As of August 31, 2026, Invesco India Smallcap Fund had delivered around 21% over one year. Bandhan Small Cap Fund had generated approximately 17%, while Nippon India Small Cap Fund was closer to 14%.

Does that automatically make Invesco the best fund? No. A one-year return captures only one market phase. It can be heavily influenced by the fund’s sector allocation, a few successful stocks or the point from which the calculation begins.

Consider two funds.

One delivers 30% in the first year, loses 20% in the second and then earns 10% in the third. Another delivers a relatively stable return in all three years.

The first fund may look superior when measured immediately after its strongest year. Over a complete period, the second fund could provide a better investor experience.

This problem is more pronounced in small cap funds because their returns move through sharp cycles.

Investors who select last year’s winner may enter after the strongest part of its performance has already occurred. The sector or investment style that helped the fund outperform can then fall out of favour.

Rolling Returns: A Better Way to Judge Consistency

Trailing returns measure performance between one fixed starting date and one fixed ending date. Rolling returns repeat the calculation across many starting dates. Suppose we want to study three-year returns between 2020 and 2026. A rolling-return analysis can measure returns from:

• January 2020 to January 2023
• February 2020 to February 2023
• March 2020 to March 2023
• Every subsequent three-year period until 2026

This gives us several observations instead of one. Rolling returns can help answer more useful questions:

• How regularly did the fund produce positive returns?
• Did it outperform only during one strong period?
• How often did it beat its benchmark?
• What was the investor experience across different entry dates?
• How bad was the weakest three-year holding period?

Median rolling return is also useful. It represents the middle outcome after all the rolling periods are arranged from the lowest to the highest. Unlike the average, it is less affected by a few unusually good or bad periods.

However, rolling-return comparisons must use exactly the same plan, dates, frequency and benchmark. Numbers produced using daily observations cannot be directly compared with calculations using monthly observations.

Bandhan also lacks sufficient history for a meaningful seven-year or 10-year rolling-return study. Comparing its available five-year record with Nippon’s 10-year record would not be a like-for-like test.

That limitation is itself an important finding.

Bandhan Small Cap Fund vs Nippon, Invesco, SBI, HDFC and Quant

The following table focuses on the three closest comparisons. Return figures are annualised for periods longer than one year.

Sources: Bandhan Small Cap Fund factsheet data, Nippon India Small Cap Fund factsheet data, Invesco India Smallcap Fund factsheet data.

These numbers reveal an important distinction.

Invesco currently leads the one-year comparison. Bandhan has produced the strongest three-year return among the three. Over five years, Bandhan, Invesco and Nippon are much closer. Therefore, Bandhan’s case does not depend on being the highest-returning scheme over every period. It depends on ranking strongly across more than one period while maintaining a reasonably diversified portfolio.

Where Bandhan Small Cap Fund Performs Best

Bandhan’s most visible strength is its three-year performance.

Its Direct Growth plan delivered approximately 26% annually over the three years ended August 31, 2026. This was substantially higher than the small cap category average of around 16%.

The difference is meaningful. At a 26% annualised return, ₹1 lakh would grow to approximately ₹2 lakh over three years. At 16%, it would grow to around ₹1.56 lakh. This calculation is only an illustration of past performance, not an indication of future returns. It shows how a seemingly small difference in annual returns can compound over time. Bandhan also maintained a competitive five-year record. While it did not decisively beat every competitor over this period, it remained among the stronger funds in the category.

Its direct-plan expense ratio of 0.60% was also slightly lower than Nippon’s 0.69% and Invesco’s 0.63%. Expense differences of a few basis points should not decide fund selection, but lower costs become useful when performance and portfolio quality are otherwise comparable.

What Rolling Returns Tell Us About Bandhan

Bandhan’s available return history supports the argument that its performance has not come from only one good year.

The scheme has delivered strong three-year and five-year trailing returns despite periods of weakness in the broader small cap market. Its performance also remained competitive across several calendar and quarterly periods after launch.

But this evidence needs to be interpreted carefully. Bandhan began operations in February 2020, close to the COVID-19 market crash. It entered at a time when several small cap valuations had already corrected sharply. The fund then benefited from the strong recovery in Indian equities after 2020.

That does not make its performance less real. The fund still had to select the right businesses and manage the portfolio.

However, it means most of Bandhan’s history comes from one broad post-2020 cycle. It has not yet been tested across as many complete bull and bear markets as Nippon, SBI or HDFC Small Cap Fund.

Consequently, Bandhan can be compared meaningfully over three-year and five-year rolling periods, but not over seven or 10 years. Investors should treat Bandhan’s strong consistency as promising but not as fully proven across multiple decades or market cycles.

How Much Risk Has Bandhan Taken to Generate Its Returns?

Return alone does not reveal the quality of a fund’s performance. Investors also need to ask how much risk the fund took to produce that return.

• Standard deviation: Standard deviation shows how widely the fund’s returns move around their average. A higher number generally means a bumpier journey. Bandhan’s reported standard deviation has been around 21, under one commonly used three-year calculation. This confirms that the fund remains volatile even when its returns are strong. That is expected from a small cap scheme.
• Beta: Beta compares the fund’s movement with its benchmark. A beta of 1 means the fund has historically moved roughly in line with the benchmark. A beta below 1 suggests slightly smaller movements, while a beta above 1 suggests greater sensitivity. Bandhan’s reported beta of around 0.9 indicates that it has taken slightly less market-linked risk than its benchmark under the measured period.
• Sharpe ratio: The Sharpe ratio measures how much additional return a fund generated for the total volatility experienced by investors. A higher Sharpe ratio is generally better, but it should only be compared among similar funds and over the same period. Bandhan’s reported Sharpe ratio of approximately 1.05 indicates that the scheme’s strong returns were not produced only by taking unusually high risk. Its risk-adjusted performance has been reasonably strong.
• Sortino ratio: The Sortino ratio is similar to the Sharpe ratio, but it focuses mainly on harmful volatility. It does not penalise a fund as heavily for rising sharply. Instead, it asks how much return the fund produced for the downside fluctuations investors experienced. This can be more intuitive for investors because most people are concerned about negative volatility, not unexpectedly high positive returns. Risk ratios vary considerably with the data source, calculation period and assumed risk-free rate. Therefore, investors should compare all schemes using one platform rather than mixing ratios from several websites.
  
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Bandhan vs Nippon: Recent Performance or a Longer Track Record?

Bandhan and Nippon offer different strengths.

Bandhan has been the stronger recent performer. Its three-year annualised return of approximately 26% was well ahead of Nippon’s return of around 16% to 17%.

It also manages a much smaller amount of money. Bandhan’s AUM was about ₹31,103 crore, compared with nearly ₹78,957 crore for Nippon. That could give Bandhan greater flexibility when entering or exiting smaller companies.

Nippon, however, offers something Bandhan cannot yet provide: a long operating history.

Nippon India Small Cap Fund has been operating since 2010, with its Direct Plan available since 2013. It has experienced multiple market phases, including the 2013 volatility, the 2018 small cap correction, the COVID-19 crash and the subsequent recovery.

Its 10-year history gives investors more evidence about the durability of its investment process.

Nippon also holds an extremely diversified portfolio. In July 2026, it owned around 251 stocks. Its top 10 holdings represented only about 13.8% of assets, while its largest stock position was below 2%.

This lowers the effect of one company going wrong. However, managing 250 stocks can also make it harder for the fund’s best ideas to meaningfully influence overall performance. The trade-off is clear.

Bandhan offers stronger recent performance and a smaller asset base. Nippon offers a much longer record and wider stock-level diversification.

Bandhan vs Invesco: Which Has the Better Risk-Reward Profile?

Invesco is arguably Bandhan’s closest current competitor.

Its one-year return of approximately 21% was ahead of Bandhan’s 17%. Its five-year return was also marginally higher, depending on the exact calculation date.

Invesco’s AUM of around ₹14,475 crore was less than half of Bandhan’s AUM. This may provide greater portfolio flexibility, particularly when investing in companies with limited market liquidity.

However, Invesco’s portfolio was more concentrated in some areas.

Its largest disclosed holding, Sai Life Sciences, represented approximately 4.94% of assets. Services and healthcare together formed a substantial part of the portfolio.

Bandhan’s largest holding was closer to 3%, although its financial-sector exposure exceeded 21%. This suggests that Bandhan spread its stock-level bets more widely, while still making a meaningful sector call on financial companies.

The decision between the two therefore depends on what an investor values.

Invesco may appeal more to someone looking for stronger recent momentum, a smaller fund size and a portfolio where larger positions can contribute more meaningfully.

Bandhan may appeal more to someone who prefers a wider spread of stock-level exposure and stronger three-year performance without paying a higher expense ratio.

There is no permanent winner. Changes in sector performance can quickly alter this comparison.

Does Bandhan’s Growing AUM Become a Risk?

Bandhan Small Cap Fund’s AUM reached approximately ₹31,103 crore by July 2026.

A large AUM has two interpretations.

• First, it reflects investor confidence, strong inflows and successful past performance. A growing fund can also spread research and operating costs across a larger asset base.
• Second, rapid growth can reduce flexibility in the small cap segment.

Suppose a fund wants to invest 1% of a ₹5,000 crore portfolio in one company. It needs to purchase shares worth ₹50 crore. For a ₹30,000 crore fund, the same 1% position requires ₹300 crore. Finding enough shares in a smaller company without pushing up the price can be much more difficult. The same problem appears when the fund wants to exit.

Bandhan’s AUM is large enough for liquidity to require close monitoring. However, it remains considerably smaller than Nippon India Small Cap Fund.

Invesco has the greatest flexibility of the three based purely on AUM. Bandhan occupies the middle position. It is no longer a small and highly flexible scheme, but its size has not reached Nippon’s level.

How Bandhan Builds Its Small Cap Portfolio

Bandhan held around 72% of its portfolio in small cap companies in July 2026. Mid caps accounted for approximately 13%, large caps for around 6%, and the remainder included cash and other assets.

This composition matters because SEBI requires a small cap fund to keep at least 65% of its assets in small cap stocks. Fund managers can use the remaining portion for mid caps, large caps or cash.

Bandhan’s allocation indicates that it provides genuine small cap exposure rather than remaining close to the minimum requirement.

Financial services was its largest sector exposure at approximately 21.6%. REC, Sobha, LT Foods, State Bank of India and Cholamandalam Financial Holdings were among its major positions.

The largest holding represented only about 3% of assets. This reduces dependence on any single stock.

A diversified portfolio can protect investors when one business performs poorly. But excessive diversification can turn a fund into a benchmark-like portfolio where successful stock selection has limited impact.

Bandhan appears to sit between the two extremes. Its individual positions are not highly concentrated, but the fund is far less spread out than Nippon’s portfolio of approximately 251 stocks.

That balance may partly explain why Bandhan has produced meaningful outperformance while avoiding dependence on one or two companies.

Where Bandhan Small Cap Fund Still Falls Short

Bandhan has several strengths, but investors should not ignore its limitations.

Its track record is short

The scheme was launched in February 2020. It does not have seven-year or 10-year performance data. Older funds such as Nippon, SBI and HDFC provide much more evidence about performance across market cycles.

Most of its history comes from a favourable period

The broad period after the 2020 crash was highly rewarding for small and mid-sized companies. Bandhan has handled later corrections, but it has not yet experienced several complete economic and market cycles.

AUM has risen rapidly

An AUM of more than ₹31,000 crore is significant for a small cap strategy. The fund must increasingly spread investments across more companies or accept smaller position sizes. This can gradually reduce the advantage produced by its highest-conviction ideas.

Recent leadership is not guaranteed to continue

Bandhan’s strong three-year return partly reflects successful portfolio and sector decisions. If the sectors it favours underperform, its category ranking can change.

Invesco is ahead on some metrics

Invesco’s one-year and five-year performance was stronger as of the comparison date. Its smaller AUM can also provide greater flexibility. Bandhan therefore cannot be described as the undisputed leader of the category.

Where Do SBI, HDFC and Quant Small Cap Funds Fit?

SBI and HDFC Small Cap funds remain relevant because of their longer histories. Their recent performance may not always match Bandhan or Invesco, but both provide greater evidence of how their investment processes perform across different market conditions.

Quant Small Cap Fund represents a different type of proposition. It has generated exceptionally strong returns during several periods, but its more active investment style can result in sharp changes in portfolio positioning and performance. This can create a less predictable investor experience.

These funds should not be dismissed because Bandhan has performed better over one selected period. An older fund with slightly lower recent returns can still suit someone who gives greater importance to process longevity and evidence across market cycles.

Who Might Prefer Bandhan, Nippon or Invesco?

This table is not a recommendation. It shows how different priorities can produce different fund choices.

Author’s Take: Is Bandhan Small Cap Fund Actually Good?

Bandhan Small Cap Fund has built a credible case for itself.

It delivered approximately 26% annualised over three years and remained competitive over five years. Its expense ratio was reasonable, individual stock exposure was controlled, and its portfolio maintained meaningful exposure to genuine small cap companies.

These factors support the view that Bandhan’s performance has come from a good combination of return and portfolio construction, not just from one lucky year.

But Bandhan does not win every comparison.

Invesco was ahead over one year and marginally stronger over five years as of August 31, 2026. Nippon offers a much longer track record and a portfolio spread across far more companies. SBI and HDFC also provide longer performance histories.

Bandhan’s biggest weakness is time. Its entire record begins in 2020, and much of its performance was generated during a favourable cycle for smaller companies. Investors still have limited evidence of how the strategy will behave across several complete market cycles.

Therefore, Bandhan can be considered one of the stronger recent performers in the small cap category, but not an unquestionably superior replacement for every competing fund.

Its growing investor conviction appears to come from its ability to rank near the top across three important areas: medium-term return, portfolio diversification and risk-adjusted performance.

Whether it can preserve this combination as its AUM grows will determine if Bandhan becomes a proven long-term small cap franchise or remains an impressive performer from the post-2020 cycle.