Is This the Right Time to Start Investing in a Small Cap Stocks or Mutual Fund?

Introduction

Hello everyone, and welcome back to the channel.

So today’s topic is something that I have been getting a lot of questions about lately.

The question is: Is this the right time to start investing in small-cap stocks or mutual funds?

Now, I do not want to give you just a one-line answer to this question and move on.

That would be too easy, and frankly, too irresponsible – I think.

What I want to do today is to give you a glimpse of my data as well.

I’ll explain the patterns, and then help you answer this question related to small-cap stocks or mutual funds.

I want to be careful here because when we deal with small caps, I must speak with clarity and responsibility.

It is easy for me to just give my opinion.

But I know that in times like these, responsible investing can be very profitable, especially in this small-cap space.

So let us get into it.

1. What the Long-Term Data Actually Tells Us

Let’s start with the big picture first.

If you look at the 10-year CAGR of the top small-cap mutual funds in India, the numbers are genuinely impressive.

• Nippon India Small Cap Fund has delivered around 21.6% per annum over 10 years.
• Axis Small Cap Fund is at about 19.3%.
• HDFC Small Cap is around 19%.
• Quant Small Cap is at 18.6%.
• SBI Small Cap at 18.8%.

Even the more conservative funds in this category have delivered between 15% and 17% over 10 years.

Now, let me put this in perspective for you.

The average return across these top small-cap funds is roughly 18% per annum over 10 years.

What does 18% compounding mean in real life?

If you had invested Rs. 10,000 per month as an SIP 10 years ago in a small-cap fund (say, like Nippon India Small Cap), your total invested amount would be around Rs. 12 lakh.

And the current value of that investment would be somewhere in the range of Rs. 36 Lakhs.

So, you invested Rs. 12 Lakhs and your final value is about Rs. 36 Lakhs

That is roughly 3 times your invested money.

That is the potential of investing in small-cap funds over the long term.

But what’s more interesting is that, 18% CAGR in 10 years is not the performance of some one lucky fund, it is a consistent pattern across the entire category of small cap direct plan mutual fund schemes.

My data shows that there were 13 numbers small cap direct plans that have been operating for the last 10 years, and 8 out of these 13 schemes generated a 10Y CAGR of 17% or more.

2. But Then Why Are People Worried Right Now?

Now, let us talk about what is making people nervous now (in 2026)?

If you look at the last 3 months, almost every small-cap fund has given negative returns.

The average 3-month return across funds is around minus 9%.

The best performer in this short window is the Union Small Cap Fund at around minus 5%, and some funds like Tata Small Cap and Helios are down around minus 12% to minus 13% in just 3 months.

So yes — whoever recently started investing or is looking at their portfolio statement right now is seeing red numbers only.

And that is uncomfortable. I fully understand that.

And if you look at the 1-year returns, the picture is not comforting either.

The average 1-year return across active small-cap direct plans is around 6.5% per annum.

That is barely above the fixed deposit interest rates.

Some funds are doing better:

• DSP Small Cap is at about 13%,
• Invesco and Mirae Asset are at 11% to 15%.

But several large funds like:

• SBI Small Cap  in only 2%,
• Kotak Small Cap is about 3%, and
• Tata Small Cap is at a minus 6.9%.

So, all of these know small-cap players are looking quite poor on a 1-year basis

So naturally, people are asking: “Bhai, kya ho gaya? Should I still be investing in small caps or not?“

Let me answer this properly so that it makes more sense to you.

3. Understanding the Pattern: Small Caps Are Cyclical by Nature

I think this is the most important part of the video, so may I ask you to please pay attention here.

Small-cap funds have always been cyclical.

What that means is — they do not give steady, linear returns.

In some phases, their returns are very good, and in some cycles, like in the last 3 months or the last 1 year, their returns get very low or even negative.

It is very important to understand this characteristic of small-cap funds before investing in them.

If you do not understand this, you will make the classic mistake: It will make you panic at the bottom and exit at exactly the wrong time.

Let me show you what I mean – I’ll be using the actual mutual fund data.

Look at the year 2017 (this is almost 8-9 years back data)

• The top small-cap funds gave anywhere from 40% to 80% returns in a single year.
• Nippon was up 65%.
• SBI Small Cap was up 80%.
• HDFC was up 63%.

Then came the year 2018. The same funds fell sharply.

• The average return across top small-cap funds was around minus 13%.
• DSP fell 25%.
• SBI fell 18.5%.
• Nippon fell 15.6%.

People who had invested in 2017 were sitting on big losses by the end of 2018.

Then, 2019 was also a weak year.

• Even in 2019, it was flat to slightly negative for most small-cap funds.

Then 2020 came:

• And the markets first crashed badly due to COVID.
• And then the recovery started.
• Small-cap funds recovered sharply in the second half.
• Funds like Quant were up 76% in 2020.
• Nippon was up 30%.
• SBI was up 35%.

Then 2021 was again an extraordinary year.

• Almost every small-cap fund gave between 49% and 91% returns in a single year.
• The average across the top 10 funds was around 67% in 2021.
• Quant Small Cap alone gave 91.7% in 2021.

These are absolutely extraordinary numbers; there is no doubt about it.

Then 2022 was again a flat-to-sideways year.

• Most small-cap funds gave between minus 2% to plus 11%.

The year 2023 was a massive bull year again.

• Nippon was up 50%,
• DSP was up 42%,
• HDFC was up 46%,
• Bandhan was up 56%.

And 2024 was also good, where most funds delivered between 20% to 45%.

And 2025 and now 2026 is again looking weak so far:

• There is a negative 1% to negative 4% for most top small-cap funds in the year 2025-26, and the broader 3-month numbers are consistently in red (as discussed earlier).

So the pattern is very clear:

Small caps have a rhythm of strong years followed by consolidation or deep correction phases.

And what we are in right now (in 2026) is a consolidation or a correction phase.

The question is —

is this a reason to be scared, or is this actually an opportunity to invest in small-cap funds?

4. What History Tells Us About Investing During Corrections

Now, let me explain something that every serious equity investor should understand

Every major correction in small-cap funds — and we have seen there have been several: in 2008, in 2011, in 2018, and in the 2020 Covid crash —

…every correction in small-cap funds has been followed by a very sharp recovery.

And in every case, the people who continued their SIPs during the down phase, or even added lump sum money during the low phase, ended up generating exceptional returns from their small-cap basket.

Let’s look at the data again.

The people who were investing in small-cap funds in 2018 and 2019 — when these funds were delivering negative returns, and everyone was saying “small caps are finished” — those same funds went on to give 49% to 91% in 2021 and 42% to 56% in 2023.

That is the pattern about small cap fund that we must always keep in mind.

The correction is what creates the opportunity.

In corrections, we are essentially buying good-quality small stocks at lower prices.  

This is the main goal of all long-term stock investors, right? We must get the opportunity to buy quality stocks when their prices are very low.

But I want to make it clear that I am not forecasting that markets will bottom out tomorrow. A lot of quality small-cap stocks have already corrected a lot. But it is also possible that a deeper correction will come in the next few weeks or months. 

Nobody knows if the small-cap index has already bottomed or not.

What I am saying is — if you are a long-term investor with a 5 to 7 year horizon, the current situation is more of a buying opportunity than a reason to stop investing.

This is my simple point.

In fact, this logic is true for all mutual fund categories – but from the data that I’ve shared with you, it is clear that small caps rebound upwards must be faster than other classes of mutual fund.

5. But Not Every Small-Cap Fund Is Worth Investing In

Now, here is where I want YOU to be very careful.

This point is very important.

Not every small-cap fund deserves your money.

Let me explain why I’m saying so.

When I look at the data, I see a clear pattern of quality separation across funds over a full cycle. For example:

Nippon India Small Cap Fund is the largest in this category with an AUM of Rs. 67,600 crore.

• Its 10-year CAGR is 21.6%.
• Its 5-year CAGR is 21.3%.
• Its 3-year CAGR is 19.6%.

Even in the current tough phase, its 1-year return is 7.85% — which is decent given the kind of environment we are in.

This fund has consistently compounded well across multiple cycles.

Its expense ratio is also low at  0.65% for direct plans and 1.4% for regular plans.

Quant Small Cap Fund has the best 5-year CAGR in the category at 23.9%, and its 3-year CAGR is 18.4%.

But it is also one of the more volatile funds — it was down 23% in 2019.

So fund like Quanty can reward you well, but it will also demand a lot of your patience in a falling market.

Quant’s expense ratio is 0.81% for direct plans and 1.64% for regular plans.

Bandhan Small Cap Fund is a relatively newer fund but has delivered 29% 3-year CAGR and 22.3% 5-year CAGR.

These are very strong numbers.

The expense ratio of this fund is 0.48% for direct plans and 1.62% for regular plans.

This is the performance of some known quality small-cap mutual fund schemes.

Now, on the other hand, if you look at funds like

• Aditya Birla Sun Life Small Cap has a 10-year CAGR of only 14%, and
• Its 5-year CAGR is a modest 13.5%

This is significantly below the category average, right?

So we can say that, as compared to peers, this fund has historically underperformed.  

Similarly, some newer funds have very limited track records and should be approached with more caution.

So the message here is this: Not all small-cap funds are equal.

So, our focus should be to invest in a quality fund with a strong track record across multiple market cycles.

6. SIP vs Lump Sum: What Makes More Sense Right Now?

Now, a practical question — should you do SIP or lump sum if you are starting now?

My view is this.

If you are a salaried person or someone who does not have a large lump sum sitting idle, then SIP is the right approach.

Continue your monthly SIP.

In fact, if you can, increase your SIP slightly during this correction phase.

If you do have a lump sum that you want to deploy, then I would suggest this is the time to put that lump sum money to work in equity.

Use these funds gradually to accumulate small cap fund every time the NAV falls.

But remember this:

Avoid putting all your lump sum in one shot right now.

I’m not saying this because small caps will definitely fall further, but because the uncertainty is still there. In case the NAV falls further, you should have money left with you to buy more at lower prices.

In such markets, being disciplined is more important than being aggressive.

7. What is the Realistic Expectation Going Forward?

Now, let me address the expectations part, because I think some people have unrealistic expectations from small-cap funds.

To tune your expectations, look at the 3-year CAGR numbers.

• The average across quality small-cap funds is about 18%.
• The 5-year average is also around 18%.
• The 10-year average is about 17.7%.

So over time, if you stay invested in a good small-cap fund, you can realistically expect somewhere between 15% to 20% CAGR over a 5 to 7-year horizon.

But — and this is a very important “but” — this return will not come in a straight line.

• There will be years where you get 50% or 60%.
• And there will be years where your portfolio shows minus 10% or even minus 20%.

You have to mentally prepare for both – fantastic numbers and deep red numbers.

The people who get the full benefit of these funds are those who stay invested through the entire cycle.

• They buy (not sell) when the NAV is falling
• They just hold when the NAV is recovering. They do not sell.

These cycles of NAV falling and recovering can happen multiple times in a 5-10 year time horizon. We must remember this.

The returns will not be a linear of 18% per annum, but it will be hugely cyclical – this is a very important understanding about small-cap funds.

So if someone asks me:

“Should I expect 18% every year?” — The answer is no. Why?

Because you should expect 18% on average over the long term.

It means that if you stay invested for 5-10 years, only then will you get the desired 18% CAGR from your small-cap funds.

But this is also true that you will ALSO see a lot of volatility in between.

8. So, Is This the Right Time to Invest?

Based on everything I have shared with you today, here is my honest view:

Yes, for a long-term investor, this is actually a reasonably good time to start or continue investing in a quality small-cap fund.

However, let me also tell you what to be careful about:

• One — Invest only that money in a small-cap fund that you can allow to stay invested for the next 5-7 years.
• Two — Keep your small-cap allocation reasonable. Small caps should not be your entire portfolio. If your total portfolio is 100%, keep a 20% limit on small caps.

Three — Choose a fund with a strong track record — at least 5 to 7 years of data, consistent performance across multiple market cycles.

High-Quality Small Caps After Recent Correction

SL	Stock Name	Sector	Why I Think It is High Quality	High ROCE, cash-rich	Risk
1	Laurus Labs	Pharma	Export-focused API + formulations	Strong global presence, improving margins	USFDA risks
2	Radico Khaitan	FMCG (Alcohol)	Premiumization play	Strong brands, margin expansion	Regulatory risk
3	Shakti Pumps	Industrial (Renewables)	Leader in solar pumps	Govt. push + export growth	Policy dependency
4	Anant Raj	Real Estate + Data Centers	Emerging DC theme	Strong land bank + DC pivot	Execution risk
5	Godfrey Phillips India	FMCG	High ROCE, cash rich	Strong earnings growth	ESG/regulation risk
6	JK Paper	Paper	Cyclical but strong balance sheet	High ROCE, industry consolidation	Cyclicality
7	Aster DM Healthcare	Healthcare	Strong hospital chain	Improving margins, asset monetization	Execution risk
8	Ajanta Pharma	Pharma	Consistent performer	High margins, niche segments	Growth moderation
9	Multi Commodity Exchange (MCX)	Financial Infra	Monopoly exchange	High entry barriers	Regulatory changes
10	Mangalore Refinery (MRPL)	Energy	PSU refining play	High operating leverage	Commodity volatility