Small cap index funds fail to match benchmark returns in 2023

The passive or index-based small cap schemes failed to match their respective benchmarks in 2023, an analysis of performance showed. There were seven passive small cap schemes and all these schemes failed to offer returns that were equal to their benchmarks. The underperformance or tracking errors were around 1.79-3.46% in 2023. Index schemes are expected to match the performance of their respective benchmarks.
We considered the passive small cap schemes that are benchmarked against Nifty Smallcap 50 – TRI, and Nifty Smallcap 250 – TRI. These benchmarks offered 65.47% and 49.09% respectively. These small cap index schemes offered around 46-62% in 2023. The underperformance, as said earlier, was around 1.79-3.46%. (See table) We considered the regular and growth options.

Aditya Birla Sun Life Nifty Smallcap 50 Index Fund, the topper in the category, offered 62.38%. However, its benchmark (Nifty Smallcap 50 – TRI) offered around 65.47% in 2023.

Axis Nifty Smallcap 50 Index Fund offered 62.01%, compared to 65.47% by its benchmark (Nifty Smallcap 50 – TRI).

Nippon India Nifty Smallcap 250 Index Fund, the largest passive small cap scheme based on assets managed, gave 47.07% compared to 49.09% by its benchmark (Nifty Smallcap 250 – TRI). The scheme manages assets of Rs 960.48 crore.

Motilal Oswal Nifty Smallcap 250 Index Fund offered 47.30% against 49.09% by its benchmark (Nifty Smallcap 250 – TRI).

Two small cap index schemes have offered more than 60% in 2023. Five schemes have offered approximately 47%. However, the benchmark indices offered higher returns (1-3% extra) in 2023.

Note, the above exercise is not a recommendation. The purpose of the exercise was to see how passively-managed small cap schemes performed in 2023.

One should not make investment or redemption decisions based on this exercise.