topped the return chart among all equity since the last Diwali celebrated on October 20, 2025 and delivered a 19.82% return in the same period, an analysis by ETMutualFunds showed. There were nearly 292 funds in the said period excluding sectoral and thematic funds.




Launched on November 4, 2024, the small-cap fund is not given a rating from Value Research or Morningstar. One of the six reasons cited by Value Research for not assigning a rating is that it does not rate equity or hybrid funds with less than three years of performance history.




Within the small cap category, there were 31 funds that have been there in the market since last Diwali and with TrustMF Small Cap Fund delivering the highest return in the same period, the fund has managed to outperform its benchmark and category average.



Also Read |



How does the fund manager see the performance of the fund?

Aakash Manghani, Fund Manager - Equities: Small caps are where tomorrow's mid and large caps are born, which is why we see them as one of the best places to create long-term wealth. India is becoming both a large consumer market and a manufacturing and engineering partner to the world, and many of the companies gaining from these shifts are still small today.




The TRUSTMF Smallcap Fund is a megatrend-anchored portfolio across several structural themes; we believe it’s well placed to keep compounding wealth for patient investors



TrustMF Small Cap Fund performance


The fund has outperformed its category average and benchmark across different horizons. Since the last Diwali, the fund gave 19.82% compared to a loss of 0.44% by the benchmark (Nifty Smallcap 250 - TRI) and a category average of 4.18%.




In the last three months the fund delivered a return of 1.72% compared to a loss of 4.05% by the benchmark and a negative category average of 2.28%.




In the last six months, the fund delivered a return of 15.48% against 2.01% by the benchmark and 5.64% as the category average. The fund posted a gain of 18.43% in the last one year against a loss of 1.50% by the benchmark and 3.31% as the category average. Since its inception, the fund has delivered a CAGR of 14.07%.



How does an expert decode performance?


Vishal Dhawan, Founder and CEO of Plan Ahead Wealth Advisors analysed the performance of this small cap fund and shared with ETMutualFunds that the fund gained mainly from focused bets in industrials, healthcare, and the consumer sector, which make up over 40% of the scheme, picking specific firms in these sectors drove strong gains and this exposure allowed the fund to catch momentum across several emerging sub-sectors.




Category wide returns were more muted,showing that general market strength only contributed a moderate portion of the total gain. Overall, stock selection drove most of the outperformance. With 72 holdings and no single stock over 2.5%, returns came from individual company choices rather than broad market trends, Dhawan further said.




If an investor invested Rs 10,000 through monthly SIP, the current value would have been Rs 2.82 lakh now with an XIRR of 22.07%. A lumpsum investment of Rs 1 lakh would have been Rs 1.29 lakh now with a CAGR of 14.07%.



Also Read |



Time to enter or wait for correction?


The expert said that jumping in right after a sharp rally carries near-term risk, especially because judging a fund by a single timeframe rarely gives the complete picture. Launched on November 4, 2024, the fund has a relatively short operating history and investors therefore need to let a longer track record build before investing.




Dhawan further said that a systematic investment plan (SIP) is the better route for small caps right now, putting in regular amounts each month helps smooth out sudden price swings and takes away the stress of trying to time market tops/bottoms, if you have a lump sum ready, avoid investing it all at once and spread that amount gradually over 12 months if the market pulls back and offers better entry points.



Portfolio allocation


Being a small cap fund, the fund holds 1% in large caps, 18.96% in mid caps, 68.76% in small caps, and 11.28% in others. In comparison to the small cap category, the fund is overweight on mid caps and others.




This small cap fund has the highest allocation in healthcare of around 16.76%, followed by 11.94% in automobile & ancillaries and 11.16% in capital goods.




According to a report from W by , Small and mid caps relative to the Sensex are 72% and 56% 56% above their historical medians, about three standard deviations high. After the 2007, 2010 and 2017 peaks, peaks, small caps lost a median 30% against large caps over the next two years.




The Smallcap 250 index's forward price-to-earnings multiple declined from 25 times in September 2024 to 23.6 times in September 2026, a reduction of just 6%. Over the same period, the Nifty 50's forward multiple fell from 24.8 times to 17.6 times, a decline of 29%, according to the report.




Small caps were also trading at a 34% premium to large caps, compared with a historical average discount of 11%.



Key risks at current valuation and volatility


Dhawan said that small-cap companies experience sharper price drops than large firms during market pullbacks, even minor earnings disappointments or operational hiccups can lead to sudden declines in individual stock prices and their business models are often less resilient, making them much more vulnerable to sudden industry downturns.




“Lower trading volumes also pose a practical challenge. In times of market stress, investors may find it difficult to exit these holdings quickly without causing sharp drops in their share price. This liquidity squeeze can trap capital or force sales at discounts when market conditions are sour.”




Stretched valuations leave little margin for error when market sentiment turns cautious and if expectations outpace business earnings, highly valued small companies face the steepest corrections, he further said.



Also Read |




The PE and PBV ratio of the small cap fund were recorded at 72.40 times and 10.55 times respectively whereas the dividend yield ratio was recorded at 0.25 times as of September 2026.




ETMutualFunds analysed the other key ratios of the fund in a three year period. Based on the last three years, the scheme has offered a Treynor ratio of 1.27 and an alpha of 1.16. The sortino ratio of the scheme was recorded at 0.37.




The return due to net selectivity was recorded at 1.16 and return due to improper diversification was recorded at 0.002 in the last three years.



How did other small caps perform?


Around 31 completed one year of existence in the industry and post TrustMF Small Cap Fund delivering the highest returns, Bank of India Small Cap Fund delivered the second highest return of 17.01% in the last one year. Tata Small Cap Fund lost the most at around 8.97% in the last one year.



Appropriate allocation and way ahead


Dhawan said that considering a 10% to 15% allocation to small-cap funds, provided your risk & return objectives are met, is a sensible rule of thumb which gives you exposure to high growth potential without exposing your broader financial plan to major downside and keeping the allocation controlled ensures that sharp swings won't impact your portfolio adversely.




“Small-cap funds require a long horizon of at least seven to ten years to ride out market cycles.Investors having a low appetite for risk should stick to more large cap oriented funds.Giving these investments enough time allows businesses to mature and recover from temporary economic setbacks”




He further said that the long-term outlook remains positive as small businesses expand alongside India's economic growth. While short-term swings are normal,disciplined long-term investing helps you benefit as these companies grow. Staying patient through dips is a reliable way to capture that long-term potential.



(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)



If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on alongwith your age, risk profile, and twitter handle