A comparison of Indian small-cap funds finds little link between benchmark overlap and one-year returns, putting the focus on stock selection and active management.
Investors often use portfolio overlap as a quick way to judge how closely a small-cap fund follows its benchmark, but a fresh comparison suggests the measure is a poor guide to near-term performance. An analysis compiled by Value Research and carried in The Wall Street Journal on 20 October 2026 found that funds with the highest overlap with their benchmarks did not consistently deliver the best one-year results, underscoring how much active management and stock selection can matter.
Among the most closely aligned funds, Axis Small Cap Fund had the highest portfolio overlap at 31.5%, yet it returned 9% over one year. Nippon India Small Cap Fund, with 28.7% overlap, posted a 7.9% gain. By contrast, TRUSTMF Small Cap Fund returned 28.8% even though its overlap was only slightly lower at 28.4%, while Union Small Cap Fund gained 21% and ITI Small Cap Fund rose 18.5%, both with lower benchmark overlap than the top two funds.
The divergence was even clearer at the lower end of the overlap range. Bank of India Small Cap Fund delivered the strongest one-year return in the comparison, at 29.1%, despite a portfolio overlap of just 11.4%. Motilal Oswal Small Cap Fund returned 19.4% with overlap of 12.4%. Yet low overlap did not automatically translate into success: Tata Small Cap Fund had the smallest overlap at 7% and still slipped 0.1%, while Quantum Small Cap Fund gained 7.1%.
The data points to a simple conclusion for investors: overlap can reveal how closely a fund hugs its benchmark, but it does not tell the whole story. According to the comparison, overlap says little about how much the manager has committed to individual stocks, how those positions have performed or how other holdings have contributed to returns. That is why advisers often recommend judging small-cap funds on a broader set of factors, including strategy, concentration and how the portfolio behaves across different market conditions, rather than relying on a single year’s performance.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
