Trust Smallcap Fund has emerged as the best performing fund in its category over the past year, delivering a 34% return as investors reassess the potential of India’s broader market. Behind the performance is CIO Mihir Vora’s “gorilla investing” approach of backing companies where the growth runway is longer than what the market is currently pricing in.

The fund held 71 stocks at the end of August, with power-capex bets contributing roughly 30% to 40% of its total alpha. CDMO, auto ancillaries, new-age companies and capital markets were among its other key winning themes. Vora explains how the fund generated alpha, why it maintains a 60–70-stock portfolio and what he sees next across India’s small- and midcap universe.

Edited excerpts from a chat:

How have you been able to generate alpha in this market and outperform all your peers in the smallcap fund?

At our AMC, and even in the smallcap fund, our investment philosophy is to look at growth investing with a terminal value prism. Growth has reasonable valuations, but the way we look at valuations is through this terminal value approach, which is what we call "gorilla investing." The crux of the matter is that you pick stocks where you believe the length of the growth runway is longer than what the market is currently discounting.

That is why we focus on themes like premium consumption, financialization of savings, physical asset creation (capital goods, infrastructure, real estate), and new-age companies. In our view, these are long-term growth stories for India that will grow faster than the rest of the market and the economy.

We have consistently been overweight on:

• Industrials — capital goods, construction, and sub-themes like power, renewables, data centers, defense, and EMS.
• Healthcare — mostly CDMO (a higher-growth segment) and hospitals.
• Consumer discretionary — auto and auto ancillaries, and some new-age B2C/platform companies (which get classified under discretionary).

On the flip side, we have consistently been underweight on FMCG, commodities, oil and gas, utilities, and large-cap IT, because we see these as relatively lower-growth segments. We focus on growth investing in long-term secular themes, and that approach is working.

Given your terminal value investing framework, why is the churn ratio so high at 200% in the smallcap fund?

There are three reasons we typically book profits, switch, or sell:

1. The original thesis is not working out. We buy assuming certain growth rates that are higher than what the market expects. If earnings don't meet our expectations over a couple of quarters, we dig into why. If it looks transient, we hold. But if it's a trend — management not delivering, sector or economic headwinds — it suggests our expectations were too high, and we exit.
2. Valuations overshoot even our bull case. Sometimes earnings surprise positively, the market gets excited, and the stock runs past even our optimistic scenario. At that point the risk-reward turns less favorable, so we start trimming (not exiting in one shot).
3. Opportunity cost. We have a fertile idea-generation machine — always 4-5-10 ideas in the pipeline. When a new idea looks better than something already in the portfolio, we switch. We don't want a long tail — our target is about 60-70 stocks — so we don't want exposures below roughly 1-1.5%.

Of the total churn, I'd estimate 70-80% comes from this third category (switching to better ideas), and around 10% from thesis not working-out.

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So what kind of growth expectations do you have when you pick a stock?

It depends on the fund. For the smallcap fund, our weighted earnings growth expectation is approximately 33% for the next two years, versus a benchmark/consensus of about 20%. In the flexi-cap fund, the Nifty 500 EPS growth consensus is about 12% for the next couple of years, while our flexi-cap fund's expectation is 26%. Across our funds, our weighted earnings growth expectations are significantly higher than the benchmarks.

In terms of individual stock weightage in the smallcap fund, how do you handle position sizing for it to be meaningful but not risky either?

Typically, I would not like a position to be less than 1-1.5% (barring stocks that are entering or exiting the portfolio), and the maximum would be about 4%. That's the range we like to work in, with 60-70 stocks in the portfolio.

Some funds go up to 5-6% in certain smallcap names. Why don't you?

We haven't found the need to. We have too many good ideas all the time, and small-cap is a very fertile space with new sectors constantly emerging. To put it in perspective, even at a cutoff of ₹2,000 crore market cap, there are about 1,150-1,500 stocks above that level. The top 100 are large caps, the next 150 are mid caps, and below that there are still about 900 stocks to choose from — that's the relevant small-cap universe.

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So what is the minimum market cap you pick stocks from?

₹2,000 crore is the minimum, but the bulk of the portfolio is in larger names — our average market cap for the fund is about ₹15,000 crore.

Which market-cap range are you getting most of your fresh, exciting ideas from?

Right now the largest name in the fund is about ₹30,000 crore, but most of our ideas are in the ₹7,000-15,000 crore range within the small-cap space.

What about mid-cap exposure?

More than 20% of the fund is in mid-caps. We have one or two large caps in the portfolio as well, but only because we consider them growth stocks — one of them is a defense play.

Is your ability to hold smaller names an advantage given your fund's relatively smaller size?

I don't think so, because our average and median market cap is actually average or above-average compared to the category — it's not that our smaller size has let us go down the cap curve as an advantage. Also, when we disclose our portfolio, there are very few unknown names — that shows we aren't really doing micro-caps; it's more about the style and stock-picking within well-known names, since some decent-sized small caps have also given superb returns.

Within the small-cap space, what new things are you finding interesting — new sectors born in the last couple of years?

These are long-term themes, nothing short-term — things like CDMO, specialty pharma, diagnostics, and aerospace.

The biggest source of alpha for us has been the power sector — power capex — roughly 30-40% of our total alpha. This includes everything linked to power capex: domestic transmission & distribution (T&D), exports driven by global data-center demand, T&D rollout in India, power equipment, and data centers including backup generators.

The second theme that has worked well is the CDMO space. The third is auto ancillaries, along with our EV and auto exposure, and new-age/platform companies (some classified under consumer discretionary), including ticketing platforms. Fourth would be capital markets.

So, in order: industrials (including auto/auto ancillaries and gold-linked players), healthcare (mostly CDMO, some diagnostics and hospitals), and capital markets.

These themes have also become very popular and crowded in the market now. During Q1 earnings, stocks jumped 10-20% the moment results beat expectations. How do you handle that, given your thesis is intact?

Either we churn within a theme, or we churn to a different theme. For example, in capital markets, if we think the theme looks overheated, we might switch to banks or NBFCs within financial services. Right now we are actually switching somewhat from NBFCs to banks, because interest rates look like they're staying elevated despite Fed actions — that's a contra play, since the market is currently focused on NBFCs and not banks. When the incremental picture turns a bit negative, we take some risk off the table. This applies across portfolios, including the large and mid-cap fund. Such top-down overlays create some churn too, but primarily we are bottom-up stock pickers.

Let's discuss the broader market. Why isn't the Nifty going up? A lot of investors doing SIPs in large-cap funds are frustrated. What's your advice?

Never stop your SIPs. SIPs are built for such times, because returns come in spurts — markets, and even individual stocks, can do nothing for a while and then suddenly move. If you're not there for that two-month move, you lose three years of opportunity. You have to stay at the crease, keep taking singles, and when the loose ball comes, you get your six — but don't try to force a six every time; wait for the loose ball, and don't get out before it comes.

The only adjustment: if you're too focused on the Nifty 50, you should diversify a bit — look at the broader market. Instead of pure large-cap exposure like the Nifty 50, consider a flexi-cap or multi-cap fund, or mid/small-cap exposure if you have the risk appetite, because structurally the broader market will likely do better than pure large caps. That's primarily because all the sectors we've been discussing are in the small and mid-cap space, not in large caps.

What's the basis for believing India's long-term growth story is intact?

If you clear out the short-term noise (oil, Trump, volatility, interest rates — all short-term global phenomena), India was the fastest-growing large economy in the world even before this underperformance, and it still is today, while China is slowing and Europe grows at around 1% versus the US at 3%. There's nothing structurally wrong with India.

The last two years of underperformance happened for two reasons. First, India had become a bit overvalued — from 2020 to 2025 we were the best-performing market in the world, so relative outperformance led to relative overvaluation. Second, this coincided with the global AI/tech wave, which pulled investor attention toward US tech (and a bit of China, Taiwan, Korea). The fact that India was already a bit overvalued gave investors an excuse to book profits and rotate into AI.

But that doesn't change the India story. In the last 20 years, India has never underperformed over a one-year period as much as it has now — this is also the deepest undervaluation we've seen versus other markets. We're now starting from extreme undervaluation, extreme under-ownership, and extreme pessimism among global investors. I think that will reverse — the AI theme won't be the only story forever, and as it cools off, India will get its rightful share. In the last couple of months, FII net selling has already reduced significantly, from a large negative toward zero — and zero can become positive. Markets have held up through record FII selling over the last 1.5-2 years because of domestic flows; if selling turns to buying, that limited floating stock gets absorbed quickly by domestic institutions and retail investors. Markets are too pessimistic and globally too underweight India — when it moves, it will move fast.

How comfortable are you with Nifty valuations?

After two years of correction, valuations have come down to comfortable levels — across large-cap, mid-cap, and small-cap indices, valuations are no longer stretched.

The Nifty 50 is now too dominated by banks, IT, and commodities — sectors that typically aren't the fastest-growing in the economy. Structurally, any new or emerging segment starts off as a small or mid-cap; large caps become very big only after growing for 10-15 years. So to capture that initial growth path, you have to be in small and mid-caps.

Going back to your "gorilla" framework, do you think some of these sectors, like capital markets and pharma (specifically CDMO, diagnostics, hospitals), can eventually become part of the Nifty?

Some already have, and the composition of the Nifty will keep changing over time. Look at how the US market's composition has changed — in 2000 it was TMT-dominated, by 2008 it was financials-dominated, and now it's back to biotech and IT ("Magnificent Seven," so to say). Markets are always like that. In fact, I'd say India's sectoral churn has actually been lower than in the US.

FIIs are also putting a lot of money into the SMID (small and mid-cap) space now.

Relative to their own industry/flows historically, yes, there has been an increase in FII investment in the SMID space, which means we now have a wider base of FIIs willing to look at the broader market. That said, I'd still say 60-70% of FII flows remain passive, mostly into large-cap indices — partly because the MSCI India index composition is also changing, with new companies being added, which drives passive flows. MSCI India now has 172 stocks, and most FII flows (60-70%, passive) go into this set of about 170 stocks.

Investors whose portfolios are largely skewed towards largecaps are suffering. What’s the best option for a mutual fund investor? Sometimes even a flexicap has 60% in largecaps.

I think the whole portfolio construction should change. The core model should be a multi-cap or flexi-cap fund to start with. As your understanding of the market increases then you can look at small and midcap kinds of funds.

There’s no reason for a flexicap fund to have 60-70% in largecaps. That’s the fund manager’s choice. Multicaps give you minimum exposures in smallcap and midcap.