NFO Pick – (Bajaj Finserv Small Cap Fund)

23 Jun 2025 , 11:02 AM

WHY INVEST IN SMALL CAPS NOW?

There are several reasons to choose a small cap fund at this juncture. They have not only outperformed mid-caps and large caps over the longer term; but the contribution of small caps to profitability is also steadily increasing. Despite the recent correction in small caps, their growth and ROCE has remained intact. Also, small caps offer exposure to several promising sectors that are not available in large caps or mid-caps. For investors looking at NFOs, many have a propensity for small caps. It is a myth that small caps have concentrated risk. On the contrary, the wide sectoral range makes them better bets for long term risk management. A word of caution, the failure rate is high, so selection becomes key.

COMBINING SMALL CAPS WITH THE QUALITY FACTOR

One of the best ways to create a small cap portfolio is to apply the quality filter to small caps, to improve outperformance. Here is why.

• If you look at the Nifty Small Cap 250 TRI, it has outperformed in 5 out of the last 19 years, which is similar to large caps. However, if the quality filter is applied by using the Nifty Smallcap 250 Quality 50 as a proxy, then the small cap story outperforms in 10 out of the last 19 years. That is where quality filter makes a difference.
• The addition of quality filter, not only improves returns, but also reduces risk. Out of the last 19 years, large caps have the lowest standard deviation in 9 years, while small cap 250 never had the lowest standard deviation. However, if quality filter is applied to small caps, then it has lowest volatility in 10 of 19 years.

Moral of the story is that adding quality filter enhances small cap performance in a big way.

HOW SMALL CAP FUNDS PERFORMED

There are a total of 30 active Small Cap Funds in India, managing a combined corpus of ₹3,39,395 Crore. The table presents the top 10 on 5-year returns of the Direct plan. Only funds with 5-year track record have been shown.

Scheme Name	Return (%) 1-Year	Return (%) 3-Years	Return (%) 5-Years	Daily AUM (₹ in Crore)
Quant Small Cap Fund	-5.89	32.06	45.78	28,515.36
Nippon India Small Cap Fund	-1.12	31.08	38.36	63,429.75
Bandhan Small Cap Fund	14.29	37.15	37.78	12,288.42
HSBC Small Cap Fund	-2.67	27.75	35.95	16,171.76
Bank of India Small Cap Fund	0.98	28.49	35.90	1,814.88
Edelweiss Small Cap Fund	2.71	28.56	35.50	4,685.79
Tata Small Cap Fund	3.92	29.38	35.29	10,752.04
HDFC Small Cap Fund	3.26	30.22	35.01	34,147.21
Invesco India Smallcap Fund	9.20	33.17	35.01	7,026.14
Franklin India Smaller Companies Fund	-3.39	31.05	34.98	13,507.60
Data Source: AMFI

 

If you take a 1-year  perspective, small cap funds delivered average returns of just 2.65%, with most delivering negative returns. However, if you consider a 3-year perspective, then these funds have delivered average returns of 27.66% CAGR. On a 5-year basis, average returns are 34.47%, although this is on the COVID base. What is more interesting is that, the variations are not too high, so the risk of selection is lower in this case. These Small Cap funds have successfully combined alpha hunt with risk management.

GLANCE AT THE BAJAJ FINSERV SMALL CAP FUND NFO

Here are key details of the Bajaj Finserv Small Cap Fund NFO.

• The NFO opens on June 27, 2025 and closes on July 11, 2025. The objective of the fund is to beat the BSE 250 Smallcap TRI, through an active selection process that combines the principles of quality, growth, and value.
• On the risk-o-meter, Bajaj Finserv Small Cap Fund is classified as “Very High Risk,” due to its predominant exposure to equity instruments and also due to the relatively higher potential risks implicit in small cap stocks.
• The Bajaj Finserv Small Cap Fund will be best suited to investors willing to take a higher degree of risk for alpha, through a well-managed risk framework. An ideal holding period would be 5 to 7 years at the bare minimum to get full benefits.
• Bajaj Finserv Small Cap Fund offers Regular and Direct plans. It also offers Growth option and IDCW option to investors. Nimesh Chandan and Sorbh Gupta will manage the equity portion, while Siddharth Chaudhary will manage the debt portion.
• Minimum application amount in NFO is ₹500 and multiples of ₹1 thereof. Subsequent additional investments will be of minimum ₹100. The fund structure supports SIPs, SWPs, and STPs too.
• There is no exit load for redeeming up to 10% of units, even within 6 months. Beyond that, an exit load of 1% on redemption value will be leviable if the holding period is less than 6 months from the date of allotment. There is no exit load after 6 months.

Bajaj Finserv Small Cap Fund is an equity fund for tax purposes. Short term gains (up to 1 year) will be taxed at 20.8%, including surcharge. Long term capital gains (beyond 1 year) will be 12.5%, after the base exemption of ₹1.25 lakhs per financial year.