Bajaj Finserv Small Cap Fund NFO: Tap into the power of quality small caps

The Bajaj Finserv MF has come up with an NFO, the Bajaj Finserv Small Cap Fund, on 27^th June 2025. The NFO will remain open for subscription till 11^th July 2025. Small-cap funds have been very popular with investors over the past several years. Over the past year (ending 31^st May 2025), small-cap fund assets under management grew by 25% (source: AMFI, May 2025). In this article, we will discuss why long-term investors may consider investing in the Bajaj Finserv Small Cap fund NFO.

Why invest in Small Cap Funds?

• Superior Wealth Creation: The chart below shows the growth of Rs 10,000 investment in Nifty Small Cap 250 TRI versus other broad market indices over the last 10 years (ending 31^st May 2025). You can see that the wealth creation by Nifty Small Cap 250 TRI was significantly higher than large cap (Nifty 100 TRI) and broad market index (Nifty 500 TRI)
  
  

  

  Source: National Stock Exchange, data as on 31^st May 2025



• Market Cap with the highest growth: The table below shows the total market cap growth of the three market cap segments, viz large cap, midcap and small cap, over the last 7 years from 2017 to 31^st Dec 2024. You can see that small caps had the highest growth of 5X times, giving 27.6% CAGR. Between Dec'21 and Dec'24, small caps increased their share in the total market capitalization of all listed companies by 6%, outperforming mid-caps (which grew by 2%) and large caps (which fell by 8%). This underscores the growing prominence of the small-cap segment and the expanding opportunities it offers. Small caps not only provide potential higher growth opportunities, but also a bigger set of opportunities.
  
  

  

  Source: AMFI, data as on 31^st Dec 2024



• Diversification across more themes compared to other market caps: Small caps offer a more diversified sectoral spread compared to large caps, i.e. more opportunities to invest in key growth sectors compared to the large cap segment. Small-cap funds can provide richer diversification to your investment portfolio.
  
  

  

  Source: BSE, data as on 31^st May 2025. Large caps are represented by BSE 100 index, small-caps are represented by BSE 250 small-cap index



• The chart below, shows calendar year returns of Nifty 100 (large cap), Nifty Midcap 150 (Midcap) and Nifty Small Cap 250 TRI. The small-cap index outperformed the large and mid-cap indices 7 times in the last 11 years.
  
  

  

  Source: National Stock Exchange, Advisorkhoj Research, data as on 31^st December 2024

Small caps and Risk: Finding the opportunity in risks

• Fear of risk: Risk and return are interrelated. Risk is, in fact, the necessary ingredient that fuels return. Without risk, there is no reward. The key lies in understanding, managing, and leveraging risk rather than avoiding it.
  
  

  



• Greater long-term potential despite higher volatility: While small caps tend to be riskier than other broad market indices, they have higher long-term potential irrespective of market direction. See the chart below that shows how small caps gave higher returns during peaks as well as troughs during volatile market periods.
  
  

  

  Source: Bajaj Fiserv MF, ACE Equity



• Importance of stock selection (active management) in small caps: While small caps tend to experience higher drawdowns compared to broader indices (see the chart on left side below), the relatively lower drawdown in the quality small cap index (see the chart right side below) highlights the importance of selective exposure. This reinforces the need for active management over passive benchmark investing.
  
  

  

  Source: Bajaj Fiserv MF, MFI explorer, data as on 31^st May 2025



• Quality small caps not only limited downside risks, but they also outperformed the Nifty Small Cap 250 TRI across different market conditions (both up and down markets) most of the time (see the chart below). Quality small caps also outperformed the broad market index, Nifty 500 TRI, in most of the years.
  
  

  

  Source: NSE, Advisorkhoj Research, data as on 20^th June 2025

Bajaj Finserv Small Cap Fund

The Bajaj Finserv Small Cap Fund is positioned as a scheme that invests predominantly in small-cap stocks using a unique INQUBE philosophy, and a process of stock selection backed by the AMC's proven expertise, to create potential alphas

1. Alpha strategy: The fund combines a 3-pronged strategy to create alpha, comprising growth, quality and value styles.


2. Investment philosophy:
   
   

   

3. Investment Process
   
   

   



4. Process of portfolio creation: The fund portfolio of 40-100 stocks will be created from the 300-400 identified stocks out of the cohort of small cap stocks.


5. Proven capability of the AMC: 78 unique small-cap holdings across existing schemes, coupled with years of combined team experience.

Is this a good time to invest in small caps?

• Valuations are reasonable: The sharp correction over the past few months have moderated valuations. Small-cap valuations are hovering around their 5-year average, with significant corrections in select pockets. This creates a favourable entry point for new NFOs to a fresh portfolio based on bottom-up stock selection by capitalizing on these selective opportunities.
  
  

  

  Source: NSE, Advisorkhoj Research, data as on 31^st May 2025

  
  

  

  Source: Bajaj Finserv MF. Companies considered here are from BSE Small Cap 250 Index, data as on 30^th April 2025.



• Undiscovered leaders: Many small caps are driving growth in niche segments and are market leaders in these segments. Selective corrections in certain segments present a favourable opportunity for small-cap NFOs to build well-positioned portfolios.

Who should invest in the fund?

The fund is suitable for investors who:

1. Want to invest in fundamentally strong businesses in the small-cap space trading below intrinsic value.


2. Investors with long term investment horizon - minimum 5 years.


3. Investors with high risk appetites


4. Consult your financial advisor or mutual fund distributor to understand how Bajaj Finserv Small Cap Fund can be suitable for your long-term investment needs.