Union Small Cap Fund: On an improving performance trajectory versus benchmark and peers

Current market context

Market has been volatile since the beginning of this year (CY 2026) due to uncertainty about trade and FII selling in January. Small caps have underperformed large caps and midcaps on YTD basis in CY 2026. The market has rebounded after the successful negotiation of Indo US Trade Deal. Tariffs on India's exports to the US have been reduced to 18%. This will make India's exports to the US more competitive than many other countries who have higher tariff rates imposed on their exports to the United States. The volatility across the broader market segments, have brought down valuations from their peak levels. With revival in consumption demand, improving profitability and relatively reasonable valuations, small cap funds may offer attractive investment opportunities at current level for long term investors.

Why invest in small cap funds?

• While small cap stocks have 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.


• When a stock moves into a higher market cap segment it can enjoy valuation rerating and create wealth for investors.


• The universe of small cap stocks (250+) is larger than the universe of large and midcap stocks combined. Small-cap stocks offer exposure to specialized, niche industries/sectors that do not exist within the large-cap universe


• Small cap stocks usually have high promoter ownership and relatively less ownership by institutional investors compared to large cap and midcap stocks. 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 are trading at deep discounts to their intrinsic valuations.


• Historical data shows that small cap stocks have outperformed large cap stocks over long investment horizons (see the chart below).
  
  

  

  Source: Advisorkhoj Research, as on 30^th January 2026. Large Cap is represented by Nifty 100 TRI and Small Cap 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 provides better diversification and alpha generation opportunities over long investment tenures.
  
  

  

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

Why invest in small caps now?

• India is projected to become the world's third-largest economy by 2030, with an estimated GDP of $7.3 trillion (source: Government of India, Press Information Bureau). 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. According to the PIB, India is on track to become the world's third-largest economy by 2030, with a projected GDP of $7.3 trillion. This robust economic expansion is expected to drive demand across all sectors, creating a ripple effect that would benefit the entire value chain, including small-cap companies.


• Small caps have weathered a tough time and are set to benefit from the recovery in demand, a result of the rationalization of GST structure.


• Formalization of the economy (shift from unorganized sector to organized sector) as result of GST reforms, digitization and increasing compliance, will benefit small cap companies. The potential upgrade in profitability can cause a decent rerating in such small, niche businesses.


• Valuations have moderated from peaks (see chart below). Investors may find attractive investment opportunities in the small cap segment at the current price levels
  
  

  

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

Investment philosophy of Union Small Cap Fund

• Long term view


• Focus on business value accretion


• Growth focused portfolio with high focus on corporate governance


• Going down the market curve without going down the quality curve.


• Benefiting from compounding of earnings and valuation re-rating for small/mid-cap mandates


• High Active Share


• True to mandate


• A defined stock classification framework, ensuring clarity: - Strategic, Tactical, Option and Liquidity.


• Conscious of liquidity

Union Small Cap Fund - outperforming the benchmark index

The chart below shows the 1 year rolling returns of Union Small Cap Fund versus the benchmark index over the last 3 years. You can see that over the past 2 years or so, the fund has started consistently outperforming the benchmark index. This shows that fund performance is on an improving trend which is very encouraging.

Source: Advisorkhoj Research, as on 12^th February 2026.

Outperforming the peer average

The chart below shows the 1 year rolling returns of Union Small Cap Fund versus the small cap category average over the last 3 years. You can see that over the past 18 months or so, the fund has started consistently outperforming the category average.

Source: Advisorkhoj Research, as on 12^th February 2026.

Limited downside risks for investors

The chart below shows he drawdowns of the fund versus the benchmark index over the last 1 year. You can see that the fund was able to limit downside risk for investors.

Source: Advisorkhoj Research, as on 12^th February 2026.

Wealth creation through SIP

SIP is one of the most ideal ways of investing in small cap funds since small cap funds are more volatile than large and midcap funds. SIPs can take advantage of price volatility through Rupee Cost Averaging. The chart below shows the growth of Rs 10,000 monthly SIP in Union Small Cap Fund since the inception of the scheme. You can see that with a cumulative investment of just Rs 14 lakhs over the last ~12 years , you could have accumulated a corpus of Rs 39 lakhs at a XIRR of 16.4%.

Source: Advisorkhoj Research, as on 12^th February 2026.

Current portfolio positioning

Source: Union MF, as on 31^st January 2026

Who can find Union Small Cap Fund suitable?

• Investors seeking long-term capital growth.


• Investors with an investment horizon of at least 5 years


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


• The fund is suitable for investment through SIP

Investors should consult their financial advisers if in doubt about whether the product is suitable for them.