Picking small-cap funds: why past rankings may mislead investors

what happened

Rankings of small-cap mutual funds can change a lot from year to year, which makes it hard to find schemes with steady returns. According to Harshvardhan Roongta, CFP at Roongta Securities, speaking to CNBC-TV18, a fund that leads for several years can drop to the bottom of its category, while a former laggard can climb to the top. Past returns alone are therefore a weak basis for choosing a fund.

Roongta advises checking the manager's experience in smaller companies, the concentration of the portfolio, liquidity and how the fund behaved in different market conditions. The small-cap universe is wider than the large- and mid-cap ones, officially holding about 250 companies. In a correction, a large position in a single stock can make it hard to sell without pushing the price down. He also noted that the five-year return of the weakest fund in the category was about 11%, versus roughly 19% for the best.

To judge whether underperformance is persistent, Roongta suggests comparing one-, three- and five-year returns with both the benchmark and the category average, and looking at rolling returns. A brief weak spell is not always telling, but lagging across all periods deserves attention. On Kotak Small Cap Fund, which he said has not met expectations, he suggested that investors could pause their SIPs for now. For ICICI Prudential Small Cap Fund, which takes a more conservative approach, he said continuing may be reasonable given current uncertainty.

why it matters

For markets, the interview is a reminder that inflows into small-cap funds depend on manager skill and liquidity under stress, not only on current rankings. Funds with concentrated holdings in smaller stocks may face pressure during a correction, and small-cap shares remain sensitive to shifts in market sentiment.

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