A Windmill Capital Approach to Equity Mutual Fund Investing
Most investors who use mutual funds typically have a similar setup. They choose a few schemes at different times for various reasons. These funds sit in a Demat account or an AMC portal. They are rarely reviewed and even less often reconsidered as a complete portfolio. While the funds may each be decent, whether they work together as a whole is a different question.
Mutual Fund smallcases are Windmill Capital’s effort to address that question using a structured method instead of relying on intuition.
What are Mutual Fund smallcases?
A Mutual Fund smallcase is a carefully chosen, regularly checked portfolio of actively managed mutual fund schemes. These are organized within a specific category and adjusted when needed.
The available categories are Large Cap, Mid Cap, Small Cap, Flexi Cap, Multi Cap, and Tax Saver (ELSS). Each smallcase contains 3 to 4 schemes, equally weighted, chosen through a research process that includes both numbers and insights.
The experience with smallcase is just like investing in any other smallcase: you make a one-time investment in the basket. When Windmill suggests a rebalance, you can update it with one action. The holdings consist of mutual fund units that are in your account directly, not a fund of funds or a pooled investment.
Why a portfolio of mutual funds, not just one fund?
Picking a single fund and holding it is not necessarily a bad choice. However, fund performance often varies significantly over time. A fund that ranks in the top quartile during one three-year period may fall to the second or third quartile in the following period. There is no single factor that reliably predicts which fund will continue to perform well.
Holding a small selection of funds within the same category helps in two ways. First, it lowers reliance on any one fund manager or investment style. Second, and more importantly, it enables the portfolio to shift toward funds that show better risk-adjusted potential when new evidence arises, instead of waiting for a fund to recover by itself.
This approach is not about diversification for its own sake. Each portfolio contains 3 to 4 funds, not 10. The goal is to have a focused selection with an advantage, not to seek comfort by spreading investments too thin.
How are schemes selected?
The selection process starts with all actively managed direct-plan, growth-option schemes in the chosen category. We filter this group down to those with at least three years of performance history. Schemes that do not allow SIP investments are excluded.
From this group, Windmill’s research process evaluates each fund using over 100 performance and risk factors. This includes absolute returns, rolling returns over different time periods, downside capture, volatility measures, and various risk-adjusted ratios. After testing for predictive value, about 10 factors stood out as consistently effective in identifying funds that are likely to outperform both their category benchmark and the median fund in their category.
Next, we conduct a qualitative review of each fund’s current portfolio holdings. This step aims to reveal anything that the return history may not show, such as unusual sector concentrations, style drift, or changes in fund manager behavior that could introduce future risk. A fund that successfully passes both assessments becomes a candidate for selection.
The final portfolio uses equal weighting. Each selected fund gets the same allocation. This approach ensures no single scheme dominates the outcome, and the portfolio’s risk is spread evenly across the selections.
When and why the portfolio changes
Rebalancing is based on triggers instead of a set schedule. The portfolio is monitored continuously, and changes are suggested when the risk-return outlook for a fund changes significantly compared to others in the same category. Rebalancing may also occur if there are changes in fund management style, investment policy, or the fund manager that create significant uncertainty.
The portfolio is intentionally structured to reduce turnover. Frequent changes in mutual funds can lead to tax costs from short-term capital gains, which diminish net returns. A rebalance is only recommended when the reasons for switching clearly outweigh the costs.
What this is, and what it isn’t
Mutual Fund smallcases are not meant to be the highest-returning option in every market phase. Actively managed funds in small and mid-cap categories tend to be riskier than large-cap or flexi-cap options, and the way the portfolio is built does not change that. The goal is to increase the chance of being in better-performing funds within each category while avoiding long periods of underperformance compared to peers.
Backtesting across all six categories shows consistent outperformance compared to the category average in both returns and risk-adjusted performance across various rebalancing frequencies. However, past results from a backtested model do not guarantee future outcomes.
For investors who are already comfortable with mutual funds and want a more structured, research-supported approach to fund selection and portfolio management—without having to create a monitoring process from scratch—Mutual Fund smallcases provide that option.
Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of a SEBI recognized supervisory body (if any) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.
The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.Users must make their own investment decisions based on their specific investment objective and financial position and using such independent advisors as they believe necessary.
Windmill Capital Team: Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.
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