Union Small Cap Fund: Outperforming benchmark and peers

Current market context

Market bounced after US and Iran agreed on a preliminary peace agreement. The broader market outperformed the frontline indices with small caps outperforming large cap stocks. However, the ceasefire looks fragile with renewal of air-strikes, and volatility has returned to the market. FII outflows continue, but resilient domestic flows have supported the broader market. Small cap stocks have outperformed large and midcap stocks in CY 2026 YTD. Historical data shows that in the long term small cap stocks have the potential of outperforming the broad market indices. In this article, we will review Union Small Cap Fund which is on a strong performance trajectory.

Why invest in small cap funds?

• While small cap stocks tend to be more volatile than large caps, their growth potential is higher than large caps over long investment horizon (please see the chart below).
  
  

  

  Source: Advisorkhoj Research, as on 30^th June 2026. Large Cap is represented by Nifty 100 TRI and Small Cap by Nifty Small Cap 250 TRI



• Stocks that are small cap today can become midcap or large cap stocks in the future. When a stock moves into a higher market cap segment it can enjoy valuation rerating and create wealth for investors.


• 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



• 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.

Why invest in small caps now?

• FIIs have been net sellers in CY 2025 and CY 2026 (YTD basis). FII sell-off has impacted primarily large cap stocks; FII investments in small caps is relatively small. On the other hand, domestic retail flows, especially through SIPs remain resilient (see the chart below). A significant part of the retail flows is going into small cap stocks through mutual funds. This has resulted small caps outperforming large caps.
  
  

  

  Source: AMFI, as on 31^st May 2026.



• The IMF expects the Indian economy to grow 6.4% in FY27 and accelerate to 6.7% the following year, keeping it among the fastest-growing major economies in the world. Index of Industrial Production (IIP) hit a 5-month high in May, despite the ongoing geo-political and macro-economic challenges e.g. rising inflation, INR depreciation etc.


• 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.

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 8^th July 2026.

Source: Advisorkhoj Research, as on 8^th July 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 8^th July 2026.

Limited downside risks for investors

The chart below shows the 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 8^th July 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 44 lakhs at a XIRR of 17.2%.

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

Current portfolio positioning

Source: Union MF, as on 31^st May 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 or mutual fund distributors is Union Small Cap Fund is suitable for their investment needs.