Top 5 Small Cap Mutual Funds by 1-Year Returns: Stars of Yesterday or Tomorrow?
If you search for the best small cap mutual funds, one of the easiest things to do is sort funds by their 1-year return.
The highest return appears at the top.
And suddenly, the decision feels simple.
That distinction matters even more with small cap mutual funds.
Small-cap companies can offer significant growth potential, but their businesses and stock prices can also be more volatile. A fund that performs exceptionally well in one market environment may look very different when that environment changes.
So instead of asking:
Which small cap mutual fund gave the highest return last year?
a more useful question is:
What made these funds stand out, what is different about their investment approach, and what would they need to do to remain competitive?
This article is therefore not a list of funds to buy. It is an examination of the five small-cap funds that ranked highest on a 1-year return basis at the time of writing.
First, what exactly is a small cap mutual fund?
Before looking at the ranking, it is useful to understand what the category actually means.
Under SEBI's mutual-fund categorisation framework, a Small Cap Fund must invest at least 65% of its total assets in small-cap companies.
That regulatory definition puts these funds in the same broad category. But it does not mean that every small-cap fund follows the same investment philosophy, owns the same companies or takes the same amount of risk.
And that difference is important when comparing funds.
The top 5 small cap mutual funds by 1-year return
Using Direct-Growth plans and the latest available performance data in the September 9, 2026 snapshot, these were the five highest-ranked funds:
| Rank | Fund | 1-Year Return |
|---|---|---|
| 1 | TRUSTMF Small Cap Fund | 35.81% |
| 2 | Bank of India Small Cap Fund | 28.72% |
| 3 | Union Small Cap Fund | 26.58% |
| 4 | Motilal Oswal Small Cap Fund | 26.38% |
| 5 | ITI Small Cap Fund | 25.39% |
Returns are trailing 1-year returns and represent a snapshot as of 9 September 2026. Mutual-fund returns change with NAV movements, so the ranking can change over time.
There is an important point hidden behind this table.
These five funds do not have identical histories.
Some have been around for several years. Others are relatively young. Their investment philosophies differ. Their portfolios differ. Their managers and management tenure differ.
So the ranking is only the beginning of the analysis.
TRUSTMF Small Cap Fund
The current 1-year star
With a 1-year return of 35.81%, TRUSTMF Small Cap Fund sits at the top of this particular ranking.
But there is an important qualification.
That means the recent performance is impressive, but the fund does not yet have the long-term history of some of the older funds in this category.
So the right question isn't simply:
How much did it make?
It is:
How much evidence do we have that the process behind that return can work through different market conditions?
What is the investment philosophy?
TRUSTMF describes its investment philosophy using two approaches: Terminal Value Investing+ (TV+) and Growth at Reasonable Valuations (GARV).
The Terminal Value approach looks beyond the immediately foreseeable period and attempts to assess the longer-term value a business can create.
The GARV approach focuses on companies with strong growth potential available at reasonable valuations.
In simpler language:
TRUSTMF is trying to find companies where the market may not yet be fully recognising the scale of their future growth.
Who manages it?
The fund has been managed since inception by Mihir Vora and Aakash Manghani.
This gives the fund an interesting characteristic: the current managers have been responsible for the fund's track record from the beginning.
But the other side of the equation is equally important: the track record itself is still young.
What should we watch?
For TRUSTMF, the biggest test is what happens when the market environment becomes less favourable to high-growth small companies.
If the TV+/GARV process continues to identify businesses whose earnings and intrinsic value grow over time, the first year's return becomes more meaningful.
If the return turns out to have been largely driven by a particular market phase or valuation expansion, it becomes much harder to extrapolate.
Bank of India Small Cap Fund
Bank of India Small Cap Fund has a very different story.
Unlike TRUSTMF, it was launched in December 2018, giving us a considerably longer history to examine.
Its 1-year return in the September 9 snapshot was 28.72%, placing it second in the ranking.
That longer history makes the fund particularly interesting.
We can ask:
Was the recent performance simply a one-year event?
Or:
Is there evidence of a process that has worked over a longer period?
What does the fund look for?
The fund invests predominantly in small-cap companies and describes its objective around companies with sustainable business models and potential for capital appreciation.
Recent portfolio holdings have included companies such as:
- Sky Gold & Diamonds
- City Union Bank
- Wockhardt
- Quality Power Electrical Equipment
- CAMS
- Arvind
- Shreeji Shipping
- Sterlite Technologies
- PG Electroplast
Who manages it?
The fund is managed by Alok Singh, with Nav Bhardwaj as assistant/co-manager.
Alok Singh has been managing the scheme since October 2024, while Nav Bhardwaj joined the management of the scheme in July 2025.
And this creates an important distinction.
The fund's historical returns cover periods before the current management team had full responsibility for the portfolio.
So when we look at the longer return history, we shouldn't automatically assume:
“This is the track record of today's fund managers.”
It isn't that simple.
What should keep it competitive?
- Whether the current team continues to add value through stock selection.
- Whether the portfolio remains appropriately diversified.
- Whether recent winners become an excessive source of risk.
- How the fund behaves during small-cap corrections.
- Whether performance remains competitive over a complete market cycle.
Union Small Cap Fund
Union Small Cap Fund has been around since 2014, giving it one of the longer scheme histories in this group.
Its 1-year return in the September 9 snapshot was 26.58%, putting it third.
What is the investment approach?
Union's small-cap strategy is predominantly bottom-up.
In practical terms, stock selection is central to portfolio construction rather than starting with a large sector-level call and then selecting companies within that sector.
The fund's investment material describes stock selection as influencing sector allocation while maintaining a diversified portfolio.
Who manages it?
The fund is currently co-managed by:
- Pratik Dharmshi — since December 2024
- Gaurav Chopra — since November 2024
This creates an important distinction.
Union Small Cap Fund has a long scheme history, but the current management team has a much shorter tenure on this particular fund.
So again, the historical performance of the scheme and the track record of the current team should not automatically be treated as the same thing.
What does the portfolio tell us?
Recent holdings have included:
- Gabriel India
- Karur Vysya Bank
- Navin Fluorine
- Kirloskar Oil Engines
- SJS Enterprises
- GE Vernova T&D India
- MCX
- Ujjivan Small Finance Bank
And here something interesting begins to appear.
Motilal Oswal Small Cap Fund
Motilal Oswal Small Cap Fund is another relatively young scheme.
It was launched in December 2023, and its 1-year return in the September 9 snapshot was 26.38%.
So once again, we have a strong recent number but a relatively short scheme history.
The QGLP framework
Motilal Oswal describes its equity investment philosophy through the QGLP framework:
Put simply:
Find a good business. Look for sustainable growth. Ask how long that advantage can last. Then ask what price you are paying for it.
This is quite different from simply searching for the cheapest small-cap stocks.
Who manages it?
The March 2026 fund factsheet listed Ajay Khandelwal as managing the fund since December 2023 and Bhalchandra Shinde since January 2026.
This is another reason to be careful with performance attribution.
The fund began with one management structure, while the current team includes a manager who joined the mandate more recently.
The relevant question going forward is:
How effectively does the current team continue to implement the QGLP philosophy in this particular small-cap portfolio?
What would keep it competitive?
If returns are supported by growing earnings and durable businesses, the performance becomes more interesting.
If returns increasingly depend on investors simply paying higher valuations, the sustainability question becomes much more important.
ITI Small Cap Fund
ITI Small Cap Fund completes the top five with a 25.39% 1-year return in the September 9 ranking.
The scheme was launched in February 2020, so it has more history than the two newer funds but less than Union or Bank of India Small Cap Fund.
What is the investment philosophy?
ITI's stated objective is straightforward: to generate capital appreciation by predominantly investing in equity and equity-related securities of small-cap companies.
Its benchmark is the Nifty Smallcap 250 TRI.
There isn't a catchy named framework here like TRUSTMF's TV+/GARV or Motilal Oswal's QGLP.
That makes the analysis more dependent on the actual portfolio, stock selection and portfolio-construction process.
Who manages it?
- Dhimant Shah — managing since August 2022
- Alok Ranjan — managing since May 2026
Once again, one of the current managers is relatively new to the scheme.
That doesn't automatically make the change good or bad.
It simply means that investors should not automatically attribute the entire historical return record to the current team.
What does the portfolio tell us?
The July 2026 factsheet showed 82 stocks. Its top five holdings accounted for 12.37% of the portfolio, while the top ten accounted for 21.65%.
The same factsheet reported a 3-year standard deviation of 19.78% and a Sharpe ratio of 0.92 for the period ended July 31, 2026.
This gives us something a simple return ranking doesn't:
And that is exactly the kind of information investors should examine.
What about overlap between these small cap funds?
This is one of the most useful questions to ask before getting excited about a list like this.
If someone sees five successful small cap mutual funds, the natural thought may be:
“Why not invest in all five?”
It sounds diversified.
But five fund names don't necessarily mean five completely different portfolios.
An analysis of these five funds' June 2026 portfolios found four common stocks across all five:
City Union Bank, for example, appeared in all five portfolios, although its allocation differed from fund to fund.
Apar Industries was also held across all five.
This doesn't mean the funds are the same.
Different fund managers can independently reach similar conclusions about attractive businesses.
But there is an important lesson here:
So an investor should understand the difference between:
They are not necessarily the same thing.
So, were these the “best” small cap mutual funds?
Not necessarily.
They were the funds that had the highest 1-year returns in the particular ranking and on the particular date we measured.
That is a much narrower statement.
A ranking can establish the first statement.
It cannot establish the second.
Why a 1-year ranking can be misleading
A fund can outperform because:
- Its investment style happens to be in favour.
- A particular sector performs strongly.
- A few holdings perform exceptionally well.
- Valuations expand.
- The portfolio takes more risk.
- The manager makes a few particularly successful calls.
Not all of these sources of return are equally repeatable.
A ranking doesn't tell you which one was responsible.
What would these funds need to do to remain on the list?
This is, in our view, the most important part of the exercise.
Instead of asking:
“Can this fund give me another 30%?”
ask:
“What would need to remain true for this fund to continue being competitive?”
1. The investment process should remain consistent
If a fund's process created an advantage, changing that process can change the character of the fund.
The historical return then becomes less relevant.
This is particularly important when there is a change in fund managers.
2. Earnings should eventually support the returns
A stock can rise because the underlying business is becoming more valuable.
It can also rise because investors are willing to pay a higher valuation for the same business.
Those are not the same thing.
If earnings don't eventually catch up with the price investors are paying, the return can become much harder to sustain.
What happened to the underlying businesses while the stocks were going up?
3. Downside matters as much as upside
Small-cap investing isn't only about participating in rallies.
It is also about what happens when the market turns.
A fund that produces spectacular returns in a rising market but suffers disproportionately during corrections may not be as attractive as its headline return suggests.
This is why measures such as standard deviation, drawdown, downside capture, Sharpe ratio and Sortino ratio can provide useful additional context.
4. Portfolio concentration should be intentional
A concentrated portfolio can create significant upside when the manager is right.
It can also create significant damage when the manager is wrong.
The question isn't:
“Does this fund own 50 stocks or 80 stocks?”
The better question is:
Does the level of concentration make sense for the manager's conviction and risk-management process?
5. Fund size should remain manageable
This is particularly relevant in small caps.
A fund managing ₹2,000 crore and one managing ₹20,000 crore don't necessarily have the same opportunity set.
As a fund grows, buying and selling smaller companies can become more difficult.
So AUM isn't just a number to compare.
Can the fund continue implementing the same strategy as it becomes larger?
6. The fund-management team should remain strong
This is one of the most overlooked parts of performance analysis.
If the manager responsible for today's portfolio is different from the manager who generated the historical return, those two things should not automatically be treated as identical.
Manager changes don't automatically make a fund better or worse.
But they do change the evidence investors should consider.
7. Returns should be judged after considering risk
The highest return isn't automatically the best outcome.
Suppose Fund A returns 30% with extreme volatility while Fund B returns 27% with substantially lower downside.
For a long-term investor, the second outcome may be more attractive.
The bigger lesson
The temptation with a ranking like this is to think:
and then ask:
“Which one should I buy?”
But investing doesn't work that neatly.
A fund can be the star of the last 12 months and struggle over the next 12.
Another fund can look ordinary over one year and become a stronger performer over five.
And a fund can have an excellent investment process but go through a period where its particular style is simply out of favour.
Stars of yesterday or candidates for tomorrow?
The five funds in this ranking have earned attention because their recent numbers stand out.
But the 1-year return cannot answer the most important question:
Can the process that produced the performance continue to work?
And for all five, the broader test is the same:
That is a much harder test than simply being number one on a 1-year return table.
And perhaps that is exactly how a fund should be judged.
Data note
Performance ranking: Direct-Growth plans, trailing 1-year returns, snapshot dated 9 September 2026. Rankings and returns can change with NAV movements.
Portfolio and manager information: Based on the latest available fund and AMC disclosures referenced in this article. Portfolio holdings and fund-management structures can change.
Category definition: SEBI's categorisation requires a Small Cap Fund to invest a minimum of 65% of total assets in small-cap companies.