Nippon India Small Cap Fund: Winning Through High Conviction Quality Stocks

With a corpus of Rs 57,010 crore, Nippon India Small Cap Fund is currently the largest scheme in the Small Cap Fund category. Since its inception in September 2010, Nippon India Small Cap Fund has done well across market phases and built an impressive track record of superior performance. It has generated returns at a CAGR of 20.7% since its inception. This has resulted in the scheme becoming popular among investors looking to create substantial long-term wealth.

The fund uses diversification as a risk-mitigation technique and holds a large portfolio of over 200 stocks spread across sectors. Nippon India Small Cap Fund aims to identify small-sized companies with high-growth potential that are available at relatively attractive valuations. This strategy has enabled the fund to become the top quartile performers in the Small Cap Fund category across time frames, generating market-beating returns.

The fund's focus on quality stocks and holding on to them with a long-term view has helped it outperform the benchmark and its peers. In the last 5 years, Nippon India Small Cap Fund has grown at a CAGR of 30.5% compared to a growth of 24.8% in its benchmark Nifty Smallcap 250 - TRI. An investment of Rs 10,000 in Nippon India Small Cap Fund five years back would now be worth Rs 37,886, while a simultaneous investment in its benchmark would now be valued at Rs 30,258.

Nippon India Small Cap Fund has managed to capitalise on the sharp run-up in the small-cap space seen in the last few years, which has helped it find a spot among the top quartile performers in its category across time frames. On a rolling return basis in the last 1 year, though Nippon India Small Cap Fund has trailed its benchmark, it has outpaced the category average by a notable margin. Over the longer 2-year and 3-year time periods, Nippon India Small Cap Fund has outperformed the benchmark Nifty Smallcap 250 - TRI by a margin of around 2.7-6 percentage points and outpaced majority of its peers by a broad margin. On a 5-year and 7-year rolling return basis, the fund stands among the category toppers and is well ahead of the benchmark.

Nippon India Small Cap Fund's volatility, as denoted by the Standard Deviation (18.19%) is slightly higher than the category average, it is much lower than the benchmark. Moreover, its Sharpe ratio (0.26), a measure of risk-adjusted return, is currently among the best in the category and far ahead of the benchmark.

What is the investment strategy of Nippon India Small Cap Fund?

Categorised as a Small Cap Fund, Nippon India Small Cap Fund is mandated to invest a minimum of 65% of its assets in equity and equity-related instruments of small-cap companies. SEBI defines small-cap stocks as companies ranking 251st onwards in terms of full market capitalisation. Nippon India Small Cap Fund aims to build a portfolio that adequately reflects a cross-section of the growth areas of the economy from time to time. The scheme's investment philosophy focuses on investing in companies with long-term growth potential available at reasonable valuations. It looks to identify high-growth businesses with reasonable size, quality management, and rational valuation.

The fund manager adopts risk management measures such as margin of safety and diversification across sectors and stocks with an aim to generate relatively better risk-adjusted returns over a period of time. Nippon India Small Cap Fund holds a large portfolio of more than 200 stocks to benefit from an optimal mix of growth, economic revival, value, and thematic plays. The fund also allocates a significant portion of its portfolio in stocks of large-cap and mid-cap companies depending on market conditions to minimise the high risk associated with small-cap stocks. Nippon India Small Cap Fund follows a buy-and-hold strategy for most of its stock holdings and has recorded a low turnover rate of 20-25% in the last one year.

Nippon India Small Cap Fund holds a large number of stocks in the portfolio and usually limits the exposure to individual stocks to well under 3-4% in order to reduce the high downside risk associated with small-sized companies. As of January 31, 2025, the fund held 233 stocks in the portfolio, with the top 10 stocks accounting for just about 14% of its assets. HDFC Bank, Multi Commodity Exchange of India, Kirloskar Brothers, Tube Investments of India, Karur Vysya Bank currently form part of the fund's top holdings.

In the last two years, the fund has benefited the most from its holdings in Multi Commodity Exchange of India, Apar Industries, Kirloskar Brothers, Hindustan Aeronautics, Voltamp Transformers, and Dixon Technologies (India) that have turned out to be multi-baggers, contributing around 15.7% to its absolute gains in the last two years. It also gained from its exposure to Elantas Beck India, karur Vysya Bank, Aditya Birla Real Estate, KPIT Technologies, Genus Power Infrastructure, eClerx Services, TD Power Systems, The Indian Hotels Company, among many others.

Nippon India Small Cap Fund's portfolio is well-diversified across Cyclical and Defensive sectors. The fund's portfolio is currently skewed towards the Engineering sector, followed by Financials and Consumption. These sectors collectively account for 44% of its assets. It also holds substantial exposure to Infotech, Consumer Durables, Power, and Pharma having allocation in the range of 4-7%.

Is Nippon India Small Cap Fund suitable for my investment goals and risk tolerance?

Nippon India Small Cap Fund has demonstrated exceptional performance over longer time frames, achieving success across most market phases. The fund has generated returns that have outpaced the market and currently ranks in the top quartile of Small Cap Fund category performers over medium to long-term time frames.

The fund has flourished under the supervision of Mr Samir Rachh who has a work experience of over two decades in the field of research and fund management. His focus on picking quality, high-conviction companies having strong business models and available at reasonable valuations has enabled him to reward investors with superior risk-adjusted returns across diverse market phases.

Nippon India Small Cap Fund is suitable for investors looking for a high-conviction-driven Small Cap Fund and having an investment horizon of at least 5-7 years.

Nippon India Small Cap Fund is closed for lump sum investment since July 2023, while investments via SIP mode are restricted to Rs 50,000 per transaction or instalment basis. 

Watch this video to explore the best performing Small Cap Funds to watch out in 2025:

Note:  This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, Membership of BASL and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.

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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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