Nippon vs Bandhan Small Cap: How are these funds consistently beating the benchmark?

Nippon India Small Cap Fund and Bandhan Small Cap Fund have emerged as standout performers in India's small-cap mutual fund category, both consistently outperforming the NIFTY Smallcap 250 TRI across multiple return metrics despite deploying significantly diversified portfolio strategies. While the funds employ different portfolio structures and risk management approaches, their shared success underscores how disciplined execution and broad diversification can still generate benchmark-beating returns in the small-cap space.

Bandhan Small Cap has captured investor attention with stronger performance over shorter periods. Over one year, the fund delivered 12.6% returns compared with the benchmark's 6.6%—a 600-basis-point outperformance. This outperformance accelerated at the three-year mark, where Bandhan achieved a CAGR of 32.6% versus the benchmark's 22.2%. Over five years, point-to-point returns came in at 25.2% versus 19.6% for the index. The fund's SIP performance was equally compelling, posting 7.3% one-year SIP returns, 17.5% over three years, and 22.1% over five years. This growth trajectory drove significant asset accumulation, with Bandhan's AUM expanding from ₹4,994 crore in May 2024 to ₹18,990 crore by December 2025, making it one of the larger funds in its category.

Nippon India Small Cap demonstrated a more consistent long-term track record, particularly valuable for systematic investors. The fund generated 9% one-year returns against the benchmark's 6.6%, with five-year CAGR of 24.2% compared to 19.6% for the index. Over seven years, Nippon delivered 23.9% returns versus 18.4% for the benchmark, with its seven-year SIP return standing at 24.7% ahead of the benchmark's 20.3%. This steadier performance profile suggests lower volatility-adjusted risk exposure relative to shorter-term returns.

On a risk-adjusted basis, Bandhan's Sharpe Ratio of 1.0677 indicates superior returns per unit of risk compared to Nippon India's 0.6892. However, both funds are notable for holding nearly 250 stocks while still delivering above-benchmark performance, challenging the conventional wisdom that diversification at scale necessarily dampens alpha generation in smaller-cap segments. The divergence in their approaches—with Bandhan positioning itself with 13% cash for opportunistic deployment and Nippon emphasizing steady SIP-friendly performance—offers institutional investors distinct risk-return profiles depending on investment horizon and cash deployment flexibility.