Small-cap mutual funds: Should you pick funds with high index overlap? What one-year returns show
Investors choosing small-cap mutual funds may look at how closely a scheme's portfolio resembles its benchmark to understand its investment strategy. But a comparison of all small-cap funds by Value Research shows that a higher portfolio overlap did not necessarily translate into better returns over the past year.
Axis Small Cap Fund had the highest portfolio overlap at 31.5%, but delivered a one-year return of 9%. Nippon India Small Cap Fund, with 28.7% overlap, returned 7.9%. Meanwhile, TRUSTMF Small Cap Fund delivered 28.8%, even though its overlap was similar at 28.4%.
At the other end, Bank of India Small Cap Fund returned 29.1% with just 11.4% portfolio overlap, while Tata Small Cap Fund, which had the lowest overlap at 7%, delivered a negative return of 0.1%.
The five funds with the highest portfolio overlap delivered markedly different returns over the one-year period.
|
Small-cap fund |
Portfolio overlap |
One-year return |
| Axis | 31.5% | 9.0% |
| Nippon India | 28.7% | 7.9% |
| TRUSTMF | 28.4% | 28.8% |
| ITI | 26.5% | 18.5% |
| Union | 25.2% | 21.0% |
| Source: Value Research. Returns as of 13 October 2026. Portfolio overlap based on September 2026 disclosures. |
The gap between Axis and TRUSTMF is particularly striking. Their portfolio overlap differed by just 3.1 percentage points, yet their one-year returns differed by 19.8 percentage points.
Similarly, Union Small Cap Fund returned 21%, while ITI Small Cap Fund gained 18.5%. Both outperformed Axis and Nippon India over the period despite having lower overlap with their respective benchmarks.
Portfolio overlap measures the commonality between a fund's holdings and those of its benchmark. However, it does not fully capture how much the fund has invested in each stock, how those holdings performed or how its other investments contributed to returns. Two funds with similar overlap can therefore produce very different outcomes.
The comparison also challenges the assumption that funds with portfolios that differ significantly from their benchmarks will consistently outperform.
|
Small-cap fund |
Portfolio overlap |
One-year return |
| Tata | 7.0% | -0.1% |
| Quantum | 8.3% | 7.1% |
| Bank of India | 11.4% | 29.1% |
| LIC MF | 12.2% | 14.9% |
| Motilal Oswal | 12.4% | 19.4% |
| Source: Value Research. Returns as of 13 October 2026. Portfolio overlap based on September 2026 disclosures. |
Bank of India Small Cap Fund recorded the highest one-year return at 29.1%, despite portfolio overlap of just 11.4%. Motilal Oswal Small Cap Fund returned 19.4% with overlap of 12.4%.
However, low overlap did not guarantee strong performance. Tata Small Cap Fund returned -0.1%, while Quantum Small Cap Fund gained 7.1%.
This variation suggests that investors should not treat either high or low benchmark overlap as a shortcut to identifying winning funds. The data shows an association between portfolio overlap and returns, but does not establish that overlap caused the performance differences.
Investors should assess portfolio overlap alongside a fund's investment strategy, portfolio composition and performance across different market conditions. A single year's returns may reflect a particular market environment and cannot, by themselves, establish whether a fund's approach will continue to work.
The comparison uses September 2026 portfolio disclosures and one-year returns as of 13 October 2026. The benchmark is the Nifty Smallcap 250 TRI, except for Union and Quantum, which are compared with the BSE 250 SmallCap TRI.
The takeaway is that a fund does not need to mirror its benchmark to deliver strong returns, nor does a portfolio that differs from the index guarantee outperformance. For investors choosing small-cap schemes, portfolio overlap is one factor to understand, not a standalone measure of fund quality.
Kirti jha
Kirti Jha is a Senior Content Producer at Mint, where she writes on mutual funds, taxation, personal finance and macroeconomic developments. Her reporting focuses on helping readers understand complex financial developments through data-driven, research-backed stories that explain how policy changes, market trends and regulatory decisions affect investors and households. <br><br> Before joining Mint, Kirti worked at ET Money, where she specialised in mutual fund research and investment analysis. She tracked portfolio disclosures, fund manager strategies, sectoral allocation shifts and investment trends, distilling large datasets into investor-focused insights. Her work combined quantitative analysis with consumer-centric storytelling, enabling readers to better understand fund positioning, portfolio changes and long-term investment opportunities.<br><br> Kirti holds a Bachelor's degree in Economics from Indraprastha College for Women, University of Delhi, and a Master's in Finance from the Jindal School of Banking & Finance at O.P. Jindal Global University. Her academic training emphasised analytical thinking, quantitative research and financial decision-making, providing a strong foundation in understanding capital markets, financial systems and economic policy. With a combined experience in investment research and financial journalism, she is committed to producing accurate, accessible and insightful journalism that empowers readers to make well-informed financial decisions.
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