According to a recent analysis by Value Research, small-cap funds can vary significantly in how closely their portfolios resemble their benchmarks. Benchmark overlap measures the proportion of a fund's stock portfolio that is also present in its benchmark index, with higher overlap indicating greater similarity to the benchmark. The study compared five funds with the highest and lowest benchmark overlap, along with their one-year performance data as of August 20, 2026.
The five funds with the highest benchmark overlap ranged from 26.6% to 32.7% of their portfolios in common with their respective benchmarks. As reported by Value Research, Axis Small Cap Fund had the highest overlap of 32.7% but delivered a return of 11.8%, while Nippon India Small Cap Fund had the lowest return at 10.6% despite having a lower overlap of 28.6%. Union Small Cap Fund delivered the highest return at 23.3% with an overlap of 26.6%, demonstrating that higher benchmark overlap does not necessarily mean poorer returns.
At the other end of the spectrum, five funds with the lowest overlap had between 6.8% and 13.1% of their portfolios in common with their benchmarks. According to Value Research, Tata Small Cap Fund had the lowest overlap of 6.8% but gave negative returns of -0.8%, while Bank of India Small Cap Fund delivered the highest return of 27.9% with an overlap of 12.9%. This data challenges the common misconception that higher active stock selection automatically translates into better performance.
AMFI's July 2026 stress test data reveals an interesting pattern where schemes with larger midcap allocations tend to fare better on liquidity stress tests. The data covers 28 small-cap funds with combined assets under management of approximately ₹4.5 lakh crore as of July 1, 2026. ITI Small Cap Fund, with 24.51% in midcaps, can liquidate both 50% and 25% of its assets in one day, while Samco Small Cap Fund with 22.41% midcap allocation could liquidate 50% of its portfolio in just 0.06 days. Conversely, funds with low midcap exposure like quant Small Cap Fund with only 8.81% in midcaps needed 48 days for 50% liquidation.
The analysis reveals that benchmark overlap indicates how differently a fund is positioned from its benchmark, but it does not fully explain the performance of an actively managed fund. As reported by Value Research, while active funds aim to generate higher returns through stock selection, the data shows that lower benchmark overlap does not automatically translate into better performance. Bank of India Small Cap Fund with only 12.9% overlap delivered the highest return, while Union Small Cap Fund with 26.6% overlap delivered the second-best return of 23.3%, demonstrating that active stock selection can be effective regardless of benchmark similarity. When evaluating small-cap funds, midcap allocation could be a useful indicator of how well the fund can handle heavy redemptions during stress.
