PGIM India Small Cap Fund: Strong turnaround in performance

Current market context

Equity market has been volatile since the beginning of this year facing headwinds arising out of geo-political uncertainties, uncertainties about Indo US trade deal and tariffs, continuing FII sell-off and INR depreciation. Small cap stocks have experienced deeper cuts compared to large and midcap stocks in the last one month. With small cap valuations near 18 month lows, investors may find attractive investment opportunities for the long term in the small cap segment. In this article, we will review PGIM India Small Cap Fund.

Why invest in small cap funds?

• Since small cap stocks have comparatively lower revenues and profits compared to large and midcap stocks, their earnings growth potential is higher – percentage growth from a smaller base can be faster than growth from a larger base. In other words, the ability to scale up is in general higher for small caps as a segment.


• Stocks that are small cap today can become midcap or large cap in the future. When a stock moves into a higher market cap segment, based on good fundamentals, then it can enjoy valuation rerating as well and create wealth for investors.


• The universe of small cap stocks (250+) is larger than the universe of large and midcap stocks combined. If we look at industry sectors, then the small cap universe includes sectors where large caps have no presence. This can potentially lead to diversified stock picking opportunities.


• Small cap stocks usually have high promoter ownership and relatively less ownership by institutional investors compared to large cap and midcap funds. Since small cap stocks tend to be relatively less researched, their price discovery is not as efficient as large cap stocks. As a result, fund managers can find enough opportunities to identify stocks that have the potential to grow in the future.


• Historical data shows that small cap stocks have outperformed large cap stocks over long investment horizons, albeit at a higher volatility and intermittent drawdowns
  
  

  

  Source: Advisorkhoj Research as on 31^st December 2025. Large caps are represented by Nifty 100 TRI; and Small caps are represented by Nifty Small Cap 250 TRI



• Historical data shows that winners rotate across market cap segments (see the chart below). Adding small caps to your portfolio may provide effective diversification and alpha creation opportunities over long investment tenures.
  
  

  

  Source: Advisorkhoj Research as on 31^st December 2025. Large caps are represented by Nifty 100 TRI; Midcaps are represented by Nifty Midcap 150 TRI and Small caps are represented by Nifty Small Cap 250 TRI



• Small caps provide more diversified and balanced sectors: Small cap stocks provide exposure to sectors where large caps do not have any presence. They also provide more balanced exposure across sectors.
  
  

  

  Source: NSE as on 31^st December 2025. Large caps are represented by Nifty 100 and small caps are represented by Nifty Small Cap 250

Is this a good time to invest in small cap funds?

• As the economy thrives and demand plays out, the full value-chain across sectors benefits from the demand pick up, and this includes small cap companies too. Along with economic data improving, corporate profitability of small cap companies can be expected to improve.


• Small caps have weathered a very tough time and are set to benefit from better demand as demand is recovering after rationalization of GST structure and direct tax cuts last year.


• Unorganized weaker companies might have exited the business or seen their market share across sectors go down, thus reducing the competitive intensity. This would entail, better top line, margins, profits and cashflows for the surviving set of companies. The potential upgrade in profitability can cause a decent rerating in such small, niche businesses.


• The sharp correction in small caps have brought down valuations from peak levels. There may attractive investment opportunities for long term investors at current valuations.
  
  

  

PGIM India Small Cap Fund – Investment Approach

• Stock selection and portfolio construction on the basis of:-


• focus on high growth and high quality pockets of the market, while picking stocks


• Fundamentals driven, bottom-up stock picking approach


• Focus on Return on Equity (ROE), Growth, Free Cash Flow generation and Leverage ratios


• Focus on fundamentals: Stock price over the medium to long term, tends to track the fundamentals of the company


• Focus on corporate governance: Companies which are backed by good management and demonstrate the ability to scale-up are generally rewarded by investors

Smart turnaround in performance

The fund had underperformed for a few years but has shown impressive performance recovery in the last 2 years outperforming the benchmark index (see the chart below).

Source: Advisorkhoj Research, as on 30^th January 2026

Limited downside risks for investors

The fund limited downside risks in volatile markets (see the drawdown chart below).

Source: Advisorkhoj Research, as on 30^th January 2026

Current portfolio positioning

Source: PGIM India MF, as on 31^st December 2025

Why invest in PGIM India Small Cap Fund?

• The scheme's investment strategy is to capture opportunities available in the small cap segment.


• The portfolio is built utilizing a combination of the top-down and bottom-up portfolio construction process, focusing on the fundamentals of each stock, including quality of management.


• The fund has a diversified portfolio with exposure across sectors, given the fact that small cap stocks present a wider investment universe.

Who can find PGIM India Small Cap Fund suitable?

• Investors looking to complement their existing core equity portfolio, with a potential to earn higher risk adjusted return


• Investors with an investment horizon of at least 5 years or more


• Investors having a commensurate risk appetite associated with small cap segment


• The fund is suitable for investment through SIP


• Investors can take advantage of market corrections to tactically invest in lump sum for long investment tenures

Investors should consult with their financial advisors or mutual fund distributors if PGIM India Small Cap is suitable for their investment needs.