Bandhan Small Cap Fund delivered 25% in 3 years, but recent returns lag peers: Should investors worry?

Bandhan Small Cap Fund has emerged as one of the top-performing small-cap mutual funds over the past three years, delivering an annualised return of 25.35%. However, its recent performance has trailed the category average across three months, six months and one year. This raises an important question for investors: does the recent underperformance signal a change in the fund’s fortunes, or is it simply a phase in the small-cap market cycle?

Launched on February 25, 2020, Bandhan Small Cap Fund has delivered a 28.64% CAGR since inception. The scheme is rated five stars by Value Research and four stars by Morningstar.

Over the past three months, the fund delivered 6.71%, compared with the small-cap category average of 8.80%. Its six-month return stood at 13.61%, against 15.92% for the category. Over one year, the fund gained 8.05%, slightly below the category average of 8.60%.

However, the picture changes significantly over longer periods. Its three-year annualised return of 25.35% compares with 16% for the category, while its five-year return of 18.08% is higher than the category average of 15.48%.

Strong long-term record, but performance uneven

The fund's yearly performance also highlights the volatility associated with small-cap investing. It gained 52.45% in 2021 before declining 6.13% in 2022. It then delivered strong returns of 53.60% in 2023 and 43.12% in 2024, before declining 1.13% in 2025.

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According to experts, the fund's outperformance has been driven primarily by stock selection rather than sector allocation. Stock selection contributed 13.05% to returns over the period, while sector allocation had a negligible negative contribution of 0.19%.

Financial services was the largest contributor, adding 6.83% to performance, supported by a portfolio return of 29.26% and an allocation of nearly 20%. Basic materials contributed 4.90%, while consumer cyclical added 4.16%.

Bandhan Small Cap Fund: Return Performance

Bandhan Small Cap Fund: Year-wise Returns

What is the fund holding? 

As of June 2026, Bandhan Small Cap Fund had assets under management of Rs 28,466 crore. Its portfolio had 91.82% allocated to equities. The fund held 72.34% in small caps, 13.25% in mid caps and 6.12% in large caps, with the remaining allocation in other assets.

Finance was its largest sector exposure at 13.30%, compared with 8.12% for the category. The fund was also overweight in banks, realty, IT, FMCG, textiles, and iron and steel, while it was underweight in healthcare and capital goods.

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The latest portfolio changes show active repositioning, with 15 fresh buys, nine exits, 83 stocks seeing higher allocation and 39 witnessing cuts.

Sector Allocation: Where Bandhan Differs From Category

Should investors worry?

Rajani said investors should not use past returns as the sole basis for investing. Instead, they should assess the fund based on risk, investment horizon, market-cap allocation and financial goals.

For existing investors running SIPs, continuing systematic investments can help navigate market volatility. Investors with fresh lump-sum money could consider staggering investments over four to six weeks rather than investing the entire amount at once.

Therefore, the recent underperformance does not necessarily indicate a deterioration in the fund's long-term investment strategy. However, investors should monitor whether its stock-selection advantage continues to translate into sustained outperformance. For a small-cap fund, three-year and five-year consistency, risk-adjusted returns and portfolio changes are more meaningful indicators than short-term returns alone.

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