Small-Cap Funds Challenge Giants in India’s Mutual Fund Industry

India’s mutual fund sector, valued at over ₹87 lakh crore, is witnessing a surprising shift in performance dynamics. Smaller, recently launched mutual funds are delivering stronger returns than many of the well-established industry leaders. This trend raises questions about whether managing larger asset pools can sometimes hinder investment agility and returns.

Jeremy Grantham, a seasoned investor, once noted that as assets under management increase, fund managers face challenges. They must either buy more stocks of lower quality or accumulate larger positions in fewer stocks, which can be difficult to manage effectively. This observation has gained renewed significance in India’s mutual fund market, where the biggest players dominate in size and reach but have sometimes lagged behind newcomers in recent returns.

A recent analysis compared 24 active equity schemes from eight new asset management companies (AMCs) launched in or after 2023 with the top three largest schemes from established AMCs across eight equity fund categories. The new funds consistently outperformed their larger competitors on average over a one-year period.

The most notable results came from the small-cap segment. Bajaj Finserv Small Cap registered a 7.5% return over 12 months, outperforming the three largest rival schemes, which averaged a -2.6% return, and also exceeding the Nifty Smallcap 250 TRI benchmark, which fell by 1.9%. The fund’s systematic investment plan (SIP) return over the same period was an impressive 12.3%.

Other new funds showed similar strength. Old Bridge Focused Fund gained 5.4%, far above the -3.5% average of the largest focused funds, while the Nifty 500 TRI index dropped 7.8%. Bajaj Finserv Multi Cap delivered a modest 0.9% return, better than the -7.6% average posted by top competitors. Helios Mid Cap Fund’s decline was limited to 0.6%, compared to a 3.4% drop among the three biggest mid-cap funds.

Unifi Flexi Cap Fund also stood out with a 4.6% SIP return over one year, outperforming the category average of -7.6% and the benchmark’s -8.9%. Even in categories with a larger focus on big-cap stocks, smaller funds like Bajaj Finserv Large Cap, which posted a -6.9% return, outperformed their bigger rivals who averaged -9.5%.

The trend extended across all eight categories analyzed, with newer funds consistently posting better SIP returns than the largest established schemes. This performance is significant given that the comparisons were made against the largest funds, not the entire category, and some categories had only one new entrant.

Historically, India’s mutual fund market was dominated by well-established institutions such as banks and large financial firms that benefited from extensive distribution networks and long-standing reputations. However, starting in July 2023, new players like Bajaj Finserv Mutual Fund, Helios Mutual Fund, Zerodha Mutual Fund, and Old Bridge Mutual Fund began entering the market, followed by others such as Unifi MF, Jio BlackRock MF, and Capitalmind MF in 2025. By September 2026, Bajaj Finserv and Helios had each accumulated assets exceeding ₹8,500 crore, demonstrating their rapid growth.

Smaller funds often have the advantage of greater flexibility when investing, especially in less liquid stocks, without significantly impacting market prices. Larger funds face operational challenges when deploying large sums, as buying or selling significant positions can move stock prices and affect returns.

Portfolio disclosures illustrate this agility. For instance, Unifi Flexi Cap increased its holding in South Indian Bank from 2.2% to 4.7%, benefiting from a 35% rise in the stock over six months. Bajaj Finserv Small Cap raised its stake in Welspun Corp, which nearly doubled in value over the same period.

Several of the new funds have allocated capital to sectors such as capital markets, industrials, and manufacturing. However, changes in portfolio composition do not always mean new purchases; sometimes, price gains alone can increase a stock’s portfolio weight. It is also important to note that not all new funds have succeeded; for example, Wealth Company Flexi Cap Fund recorded a 9.7% loss over one year, showing that youth and small size do not guarantee success.

There are limitations to the current data. Many new funds have short track records, and two-year performance data is often unavailable. Differences in investment styles, sector focus, and cash levels can also influence returns. Investors should be cautious and consider whether these newer funds can sustain their performance over multiple market cycles.

While scale, experience, and an established brand remain valuable in mutual fund selection, they do not automatically ensure superior returns. The recent performance of smaller, newer funds demonstrates that these Davids have made a notable impact on the Indian mutual fund landscape. The traditional giants may still have significant advantages, but their dominance is being challenged in meaningful ways.