Author: Aditya Pareek | EQMint | Market News
Small-cap mutual funds have become increasingly popular among investors looking for high-growth opportunities in the equity market. These funds typically invest in emerging companies with strong potential but higher volatility. However, not all small-cap funds use the same strategy. A crucial factor that differentiates them is their benchmark overlap—a metric that indicates how closely a fund’s portfolio resembles the index it tracks.
Benchmark overlap plays an essential role in evaluating a fund’s level of active management, risk profile, and alpha-generating potential. Recent data highlights a clear divide between funds with high benchmark overlap and those with low overlap. Understanding this divide helps investors make more informed decisions aligned with their risk appetite and return expectations.
Funds With the Highest Benchmark Overlap
Some small-cap funds maintain a portfolio very similar to the index they are benchmarked against, such as the NIFTY Smallcap 250 TRI or the BSE 250 SmallCap TRI. These funds typically hold many of the same stocks as the benchmark, resulting in overlap levels ranging from 23% to over 31%.
Axis Small Cap Fund, with an overlap of 31.62%, tops this list. This suggests a strategy that closely mirrors the benchmark. Although this approach limits aggressive stock-level bets, the fund has still delivered a solid 5-year return of 26.53%. It appeals to investors who prefer stability while still wanting small-cap exposure.
Nippon India Small Cap Fund shows a similar overlap of 31.01% but has produced one of the strongest 5-year returns at 32.29%. This indicates that even benchmark-heavy funds can outperform through strategic sector allocation and disciplined risk management. It reinforces that high overlap doesn’t necessarily limit returns.
HSBC Small Cap Fund, with a 27.58% overlap, maintains a balanced approach—neither extremely active nor overly benchmark-driven. Its 5-year return of 29.48% reflects its moderate but consistent strategy.
Canara Robeco Small Cap Fund has a 24.51% overlap, which still indicates a fair level of similarity to the index. Its 5-year return of 28.19% highlights a risk-managed style where the fund stays reasonably close to the benchmark without compromising too much on performance.
Aditya Birla Sun Life Small Cap Fund rounds out this group with an overlap of 23.45% and a 5-year return of 23.43%. Its returns mirror its relatively passive strategy, providing stability but less aggressive alpha generation compared to more actively managed peers.
Overall, high-overlap funds tend to take fewer risks and align their holdings with the broader small-cap market. This makes them suitable for conservative investors who want small-cap exposure with more stability.
Funds With the Lowest Benchmark Overlap
On the other side are funds with significantly lower benchmark overlap—ranging from around 5% to 12%. These funds typically follow a high-conviction approach where the fund manager selects companies outside the benchmark, aiming for differentiated performance and long-term alpha.
Tata Small Cap Fund stands out with an exceptionally low overlap of just 5.08%. This indicates a highly active investment strategy focused heavily on off-benchmark opportunities. Its 5-year return of 29.21% shows that such an approach can deliver strong long-term performance when executed well. However, it may also bring higher volatility.
LIC MF Small Cap Fund, with a 10.39% overlap, follows a similar high-conviction strategy. Its 5-year return of 27.63% suggests that selective, off-benchmark investing can offer competitive returns when backed by solid research and disciplined execution.
ICICI Prudential Smallcap Fund, with a 12.47% overlap, is also known for its active management style. The fund often invests in early-stage growth stories that may not yet be part of the benchmark index. This strategy has earned it a 5-year return of 27.78%, underscoring the value of independent stock selection.
DSP Small Cap Fund, at 12.48% overlap, continues to maintain a differentiated portfolio. Its 5-year return of 26.70% reflects a disciplined and sometimes contrarian approach, making it suitable for investors willing to withstand market fluctuations.
HDFC Small Cap Fund, with a 12.69% overlap and a strong 5-year return of 30.00%, highlights the power of active management. By selecting unique opportunities outside the standard benchmark stocks, the fund has been able to outperform many benchmark-aligned competitors.
Low-overlap funds are ideal for investors seeking high alpha and willing to handle higher volatility. Their performance often depends on the fund manager’s skill and ability to identify rising small-cap companies early.
Key Takeaways for Investors
Benchmark overlap serves as a valuable tool to understand how aggressively a fund manager takes active bets.
High-overlap funds:
- Offer stability and lower volatility
- Reduce the risk of significant underperformance
- May lag in high-growth market phases due to limited off-benchmark exposure
Low-overlap funds:
- Provide higher alpha potential
- Carry greater volatility and stock-specific risks
- Offer unique opportunities not captured by broad indices
Choosing between the two depends on an investor’s risk appetite, goals, and investment horizon. Those seeking steady exposure may prefer high-overlap funds, while those aiming for long-term growth and willing to tolerate volatility may lean toward low-overlap, high-conviction portfolios.
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Disclaimer: This article is based on information available from public sources. It has not been reported by EQMint journalists. EQMint has compiled and presented the content for informational purposes only and does not guarantee its accuracy or completeness. Readers are advised to verify details independently before relying on them.
