Bajaj Finserv Small Cap Fund: Wealth creation potential with quality small cap picks

Current market context

Equity market has been very volatile for the past 12 months due US tariff related headwinds, geo-political uncertainty, INR under pressure and FII sell-off. Within this, small cap stocks tend to be more volatile than large and midcap stocks. As a result, small caps have underperformed as compared to large and midcap stocks over the past 12 months. In this difficult period, recognising the potential of this market cap segment, Bajaj Finserv AMC launched the Bajaj Finserv Small Cap Fund, in June 2025. The fund, despite of volatile markets, has made a good start outperforming its benchmark index.

Today, the market has rebounded after India and US agreed on a Trade Deal which reduced tariffs on Indian exports to the US from 50% to 18%. The macros of Indian economy are strong with robust GDP growth, narrowing fiscal deficit, stable inflation and revival in consumption demand.

Hence, the sharp correction in small cap stocks has moderated valuations in this space creating attractive investment opportunities for investors in small caps.

In this article, we will discuss why long-term investors may consider small caps and how Bajaj Finserv Small Cap Fund’s quality focused investment strategy has helped it outperform in such a market.

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 16^th February 2026). 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 16^th February 2026



• 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 large cap segment.
  
  

  

  Source: NSE, data as on 16^th February 2026. Large caps are represented by Nifty 100 index, small caps are represented by Nifty Small Cap 250 index



• The chart below, shows calendar year returns of Nifty 100 (large cap), Nifty Midcap 150 (Midcap) and Nifty Small Cap 250 indices. The small cap index outperformed the large and midcap indices, 7 times in the last 12 years.
  
  

  

  Source: National Stock Exchange, Advisorkhoj Research, data as on 31^st December 2025. Large caps are represented by Nifty 100 TRI, Midcaps by Nifty Midcap 150 TRI and Small Caps by Nifty Small Cap 250 TRI



• The chart below, shows the 3 year rolling returns of the small cap index versus the broad market index (Nifty 500 TRI) since inception of the small cap index. You can see that barring short term setbacks, the small cap index was able to outperform the broad market index most of the times. Instances (number of observations) of Nifty Small Cap 250 index giving 15%+ CAGR returns (52% of the observations) were significantly higher than that of Nifty 500 TRI (34% of the observations).
  
  

  

  Source: National Stock Exchange, Advisorkhoj Research, data as on 16^th February 2026

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.
  
  

  



• Importance of stock selection (active share) in small caps: The chart below shows the 3 year rolling returns of Nifty Small Cap 250 Quality 50 TRI versus the Nifty Small Cap 250 TRI. You can see that quality small caps consistently outperformed the broader small cap index. This highlights the importance of selective exposure. This reinforces the need for active management over passive benchmark investing.
  
  

  

  Source: NSE, Advisorkhoj Research, data as on 16^th February 2026



• Quality small caps offered superior risk / return trade off. Quality small caps have lesser instances of negative returns over different investment tenures and significantly higher percentage of instances of 12%+ and 15%+ CAGR returns compared to the broader small cap index. In other words, quality through superior stock selection, offers superior risk / return trade-off to investors.
  
  

  

  Source: NSE, Advisorkhoj Research, data as on 16^th February 2026. Small cap is represented by Nifty Small Cap 250 TRI and Quality Small Cap by Nifty Smallcap 250 Quality 50 TRI.



• The chart below shows the drawdowns of quality small caps versus the broader small cap index over the last 10 years. You can see quality small caps limited downside risks for investors.
  
  

  

  Source: NSE, Advisorkhoj Research, data as on 16^th February 2026



• Quality small caps outperformed the broad market Nifty Small Cap TRI during market rallies and experienced lesser drawdowns during downcycles most of the time (see the chart below). Quality small cap also outperformed the broad market index Nifty 500 TRI in most of the years.
  
  

  

  Source: NSE, Advisorkhoj Research, data as on 16^th February 2026

Bajaj Finserv Small Cap Fund

The Bajaj Finserv Small Cap Fund is positioned as a scheme that invests 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 strategy begins with a forensic screening to filter out companies with governance concerns or potential red flags, reinforcing the importance of knowing what to avoid. From the remaining universe, the fund applies a three-pronged framework of growth, quality and value to build the portfolio and generate alpha.


2. Investment philosophy:
   
   

   



3. Pillars of investment approach:
   
   

   



4. Investment Process:
   
   

   



5. Process of portfolio creation: Out of the 300-400 identified stocks universe of small cap companies, the fund portfolio will consist of 45-100 stocks which have been selectively chosen based on their Alpha strategy.

Is this a suitable time to invest in small caps?

• Valuations have moderated: The sharp correction over the past few months have moderated valuations. Valuation gap between large cap and small caps have narrowed considerably. There may be attractive stock picks at current valuations.
  
  

  

  Source: NSE, Advisorkhoj Research, data as on 16^th February 2026



• Undiscovered leaders: Many small caps are driving growth in niche segments and are market leaders in these segments. A correction in the segment gives an opportunity for selective stock selection to create a diversified portfolio.

Current portfolio positioning

Source: Bajaj Finserv MF Fund Factsheet, as on 31^st January 2026

Who should invest in the Bajaj Finserv Small Cap 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. Want a diverse portfolio investing across sectors


3. Are looking to build wealth over the long term by investing in the upcoming market leaders.

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