Last Updated on September 17, 2025 at 10:56 am
We discuss the performance consistency of actively managed small cap funds by comparing them with the Nifty Midcap 150 index. Some readers may be surprised as to why we are not choosing a small cap index like Nifty Small Cap 250.
This is because we are not trying to pursue a PhD here (I made that mistake once in my life). We are not trying to write a research report. We are trying to find out if the fees charged by active small cap funds are worth it by comparing their performance consistency with an index that is hard to beat. We have repeatedly shown that the Nifty Small Cap 250 index consistently underperforms the Midcap 150 index. Most recently here: Nifty vs Nifty Next 50 vs Nifty Midcap 150 vs Nifty Smallcap 250: Return Comparison Sep 2025.
We believe that the Midcap 150 is the most appropriate index to judge active small cap index performance. Also see: Why are you comparing Small Cap Mutual Funds with a Mid Cap Index?!
The freefincal active equity mutual fund screener, published monthly, uses the Midcap 150 to compare small cap funds. It also uses Midcap 150 Quality 50 and Smallcap 250 Quality 50 indices. We do not include the factor indices in this study as they themselves have an active component. This is the link to the latest screener. If you are reading this article later, use the first link in this paragraph to access the archive of screeners (the latest will be on top).
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Reward measure: Rolling returns outperformance consistency.
Rolling returns are a simple estimate of how consistently a fund has outperformed a benchmark. Take, for example, the Nippon India Small Cap Fund vs Nifty Midcap 150 (graph below) between January 1, 2013, and Sep 12, 2025. There are 1891 5-year rolling returns. If the return for each of these durations is plotted for the fund and index together, we will get a graph like this.
The fund has outperformed the index 1891 out of 1891 times. Thus, the rolling return outperformance consistency over seven years is 100%, indicating excellent performance. A consistent performer should beat the index at least 60% to 70% of the time. So, the higher the rolling return outperformance consistency, the better.
For the high fees the AMCs charge, we expect a performance consistency of 70%. If they fail, then they do not deserve such high fees. We are better off with an index fund.
Active Small Cap Funds vs Nifty Midcap 150 TRI
- Over 5 years, only 11 out of 21 funds qualified (rolling return outperformance consistency of 70% or more)
- Over 4 years, only 11 out of 23 funds qualified.
- Over 3 years, only 7 out of 23 funds qualified.
- Over 5 and 4 years, only 10 out of 21 funds qualified.
- Over 5, 4, and 3 years, only 7 out of 21 funds qualified.
You can use our screener to find out fund names, but it is not the point. We must appreciate that very few funds manage to beat the Nifty Midcap 150 consistently. So we are better off without active small cap funds.
How about a Nifty Midcap 150 index fund?
While it is not a terrible choice, investors must appreciate that this segment can underperform large cap stocks for years. The index, comprising 150 stocks with relatively lower liquidity than large caps (higher impact costs), may exhibit high tracking errors during market stress. So we do not recommend this either.
We suggest four choices.
- Consider sticking to a simple Nifty 50, Sensex 30, or even a Nifty 100 index fund.
- If you want “some” mid cap exposure, use a Nifty Next 50 index fund with the right expectations – Nifty vs Nifty Next 50 vs Nifty Midcap 150 vs Nifty Smallcap 250: Return Comparison Sep 2025
- If you want whole market coverage, consider a Nifty 500 index fund, but with the right expectations – Nifty 50 or Nifty 500, which index fund should I choose? This will have some small cap exposure and satisfy FOMO better!
- If you want more concentrated mid cap exposure, consider the Nifty Large Midcap 250 – but again, understand the risks. See: Can I invest in a Nifty LargeMidcap 250 Index Fund?
Regardless of your choice, never assume yours is superior. Always expect periods of underperformance where your patience and conviction will be heavily tested. That is the price you need to pay for building wealth via equities.