Indian small-cap mutual funds attracted ₹7,973 crore in August 2026, while large-cap schemes faced outflows. However, top fund managers are using starkly different strategies—from holding high cash to building concentrated portfolios. For investors, this means the risk level varies widely between funds, so checking the portfolio strategy is more important than ever.
Investors continued to flock to small-cap mutual funds in August 2026, pouring a net total of ₹7,973 crore into the category. This trend stands in contrast to large-cap funds, which saw outflows for the second consecutive month, showing that retail interest in smaller companies remains strong despite broader market volatility.
However, behind the high inflows, the top fund managers in this category are managing these massive assets in very different ways. The strategies range from keeping significant cash reserves to cushion against market swings, to picking fewer stocks to aim for higher growth. Because small-cap companies can be harder to buy and sell quickly, these management styles create very different risk profiles for investors.
Contrasting Management Styles
Bandhan Small Cap Fund, managed by Manish Gunwani, has opted for high diversification. With an asset base (AUM) of ₹34,176 crore, the fund holds 258 stocks. A notable part of its strategy is keeping 13.32% of its portfolio in cash. This is roughly double the category average, acting as a buffer during market downturns or allowing the manager to deploy money when opportunities arise.
In contrast, the Invesco India Smallcap Fund, managed by Taher Badshah and Aditya Khemani, follows a concentrated approach. With roughly 70 stocks, it is much more focused than its peers. The fund directs about 35% of its assets into its top 10 holdings, aiming to capture growth from a smaller number of companies. This style keeps cash levels relatively low, at 4.76%, reflecting a preference for being fully invested in their highest-conviction picks.
Meanwhile, the Nippon India Small Cap Fund, the largest in the category with an AUM of ₹82,580 crore, faces the challenge of scale. Managed by Samir Rachh, the fund tracks 254 stocks to manage liquidity across such a large asset base. To handle the size, it maintains low cash reserves of 2.73% and keeps about 14.21% of its portfolio in large-cap stocks. This large-cap exposure is often a strategy used by very large small-cap funds to ensure they can manage high inflows and outflows without disrupting the smaller stocks in their portfolio.
Why Strategy Matters for Investors
For an investor, understanding these differences is vital because small-cap funds are not created equal. A fund with high cash reserves may perform better during a sharp market fall because it has cash to buy stocks at lower prices and avoids selling in a panic. On the other hand, a concentrated fund might show stronger gains during a market rally because its best picks have a larger impact on returns.
Small-cap investing carries risks, including high volatility and the difficulty of trading shares of smaller companies. Large funds, in particular, may struggle to invest in very small companies without moving the share price significantly. As a result, investors should look at a fund’s fact sheet to understand its cash levels, concentration, and if it holds large-cap stocks. Relying only on past returns or the fund’s label can lead to surprises if the market changes, as the underlying risk approach of each manager is quite distinct.