Share.Market by PhonePe released the CRISP Mutual Fund Scorecard for the quarter ending March 2026. The latest report questions the long-held “Small-Cap Alpha” belief that small-cap funds offer higher returns over the long term. Moreover, the margin of outperformance may not sufficiently compensate for the disproportionately higher risks involved.
Nilesh D Naik, Head of PhonePe Mutual Funds opined on the report saying, “Contrary to popular belief, a simple buy-and-hold strategy in small caps may not optimally compensate for the risk. The latest CRISP MF Scorecard suggests a strong negative correlation between past 3-year outperformance and future 3-year outperformance vs the large caps, favoring a tactical approach based on relative valuations.”
The Risk-Reward Paradox
The insights have been drawn from the analysis of 20 years of historical data between the Nifty Small Cap 250 TR Index and the Nifty 100 TR Index. While the common perception is that small caps are the primary engine for portfolio growth, the data highlights a different reality –
- The Yield Gap: The Nifty Small Cap 250 Index delivered an annualized return of 54% versus 11.72% for the Nifty 100 TRI resulting in an outperformance of just 0.82%.
- The Volatility Risk: To earn that extra 0.82%, investors endured an annualized volatility of 81%, compared to 21.06% for large cap, alongside significantly higher maximum drawdowns.
Cyclicality and Tactical Investing
The scorecard emphasizes that small-cap performance is highly cyclical, thriving in bullish phases (like 2014–2017) and struggling during corrections (like 2018–2020). Over 3-year periods, small-cap outperformance ranged from a staggering +20.52% during bull runs to a dismal -17.16% during market corrections.
Way Forward for Investors
After the time correction over the last couple of years, the performance gap between small and large caps has narrowed. With valuations returning to more reasonable levels compared to previous peaks, the report suggests a potential 12-to-18-month window for aggressive investors to consider tactical entries into the small-cap space.
Given the extreme cyclicality in the small cap space, the CRISP Mutual Fund Scorecard emphasizes the need for rigorous fund selection.
- Performance Consistency: Choose funds that have demonstrated higher performance consistency vs peers.
- Investment Style: A disciplined bias toward Quality and Value is better to manage inherent market risks.
Through the CRISP Mutual Fund Scorecard, Share.Market by PhonePe continues to provide investors with a data-driven framework to navigate market complexities. For those looking to navigate the volatile small-cap landscape, prioritizing quality and value-oriented selection remains the most viable path to achieving long-term financial goals without undertaking undue risk.
For more information download the report fromhere.
