Small-cap mutual funds, once the star performers of the market, have delivered weak results over the past year. After several years of very strong gains, the category has cooled sharply, leaving many investors wondering what caused the slowdown and whether they should stay invested.
As of 19 November 2025, small-cap mutual funds have delivered an average return of 2.5% in the last 1 year, according to Ace Mutual Fund data. Year to date, the category is down 3.34%, showing that the pressure has continued through the current year.
This phase marks a big change from the high double-digit returns that attracted many investors in recent years.
The main reason for the weak performance is high valuations. Small-cap stocks had risen too quickly, making them expensive. At the same time, company earnings did not grow fast enough to support the rising stock prices. This mismatch led to a correction.
Small-cap companies are also more sensitive to economic uncertainty and slower profit growth, which added to the decline in returns.
The current numbers look especially low when compared with the strong performance of the last few years. In four out of the last five calendar years, small-cap funds delivered impressive gains:
Several funds stood out during these years. Quant Small Cap Fund delivered 74.90% in 2020 and 88.05% in 2021. Bandhan Small Cap Fund led in 2023 and 2024 with returns of 53.74% and 42.77%.
On the other hand, some funds posted much lower returns, showing the wide range of outcomes in the category. For example, HSBC Small Cap Fund returned 15.41% in 2020 and ICICI Prudential Smallcap Fund delivered 15.46% in 2024.
The current slowdown is worrying for some investors, especially new ones. However, small-cap funds are meant for long-term wealth creation and often go through sharp ups and downs. They tend to recover strongly when economic conditions improve and earnings pick up.
Investors should check their risk appetite, continue SIPs if they have a long-term horizon, and avoid reacting to short-term volatility.
Read more: Best-Performing Midcap Funds: 3-Year Leaders That Beat Their Indices.
With one-year returns at just 2.5% and YTD performance down 3.34%, small-cap funds are clearly in a cooling phase after years of exceptional growth. While the short-term numbers are weak, disciplined long-term investors who stay invested and maintain balanced portfolios are better placed to benefit when the next recovery cycle begins.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.
Mutual Fund investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
Published on: Nov 21, 2025, 9:47 AM IST
We're Live on WhatsApp! Join our channel for market insights & updates
Get the link to download the App
