Amid the current market fall, some investors are facing a dilemma on whether to continue their systematic investment plans (SIPs) in mid and small-cap mutual fund schemes. In 2025, the Nifty 50 has seen a decrease of around 2 percent, while the Nifty Midcap 150 index has dropped by 7 percent, and the Nifty Smallcap 250 index by 9 percent.
Investors who have benefited from the strong uptrend in these sectors are taken by surprise as prices suddenly drop. Looking back at the historical performance of small and mid-cap mutual funds, it becomes evident that certain years have brought significant challenges, only to rebound in the subsequent year.
In a social media post, B Padmanaban, CFP, specialising in Mid & Small cap investments, emphasized the importance of staying committed to long-term investments despite short-term market volatility. Investments should be viewed as long-term commitments that span decades, even through periods of uncertainty.
Giving an illustration, Padmanaban explained that if an individual began investing in small-cap stocks just one year prior to the first COVID-19 lockdown, their SIP of Rs. 10,000 for one year would have ranged from Rs. 72,903 to Rs. 94,338 during the pandemic. However, investors who continued their SIP a year later experienced returns ranging from 33.65% XIRR to 69.2% XIRR, demonstrating the resilience and profitability of small-cap investments. The recent market correction of over 20% in the small-cap sector has caused 6-year returns to fluctuate between 16.55% and 32.46%.
Analysing this data highlights the volatility of small-cap investments but also underscores the potential for significant rewards. Critics who underestimate small caps often overlook their underlying behavior and the possibility of substantial long-term returns.
Small-cap investment during market dips
Small-cap equity funds are an attractive option for investors seeking to achieve ambitious long-term financial goals. However, timing allocation to this asset class can be challenging. During periods of rapid market growth, experts often caution against small-cap investments, as they may be more susceptible to market downturns. Recently, Sankaran Naren, Chief Investment Officer of ICICI Prudential Mutual Fund, advised investors to exit small-cap and mid-cap stocks entirely.
Naren's cautionary advice has prompted investors to reevaluate their portfolios and reduce exposure to these struggling sectors. He noted that some investors rely on Systematic Investment Plans (SIPs) to mitigate volatility while investing in smaller companies. However, the momentum of these stocks has weakened, falling below their daily moving averages. Naren recommended exploring alternative options such as hybrid schemes or multi-asset funds for diversification.
Investment and time
Small-cap funds offer a wider selection of stocks compared to large-cap or mid-cap funds. By investing in small-cap equity funds, investors can determine a fixed allocation and maintain consistency in their portfolio.
Investing in small-cap funds during a bull market peak can be risky due to their tendency to experience volatile swings in value. Over the past 15 years, the Nifty Smallcap 250 has shown a loss of 41% in its worst year and a gain of 136% in its best year on a rolling one-year return basis. In comparison, the Nifty Midcap 150 had a loss of 32% in its worst year, while the Nifty 100 saw a decrease of 29%.
The Nifty Smallcap 250 has experienced losses 35% of the time over the last 15 years, while the Nifty 100 had losses only 17% of the time. However, the Smallcap index has delivered an average annual rolling return of 19.5% compared to the Nifty 100's 14%.
During the recent market downturn, the Nifty Smallcap 250 has dropped about 14% from its peak, aligning with the decline in the Nifty 100 index.
Smallcap funds in your portfolio
In your portfolio, if you do not currently have an allocation to small-cap funds, it may be a wise decision to start investing now as some of the correction has already taken place. However, due to the potential for further downside, it is advisable to consider the systematic investment plan (SIP) route.
When investing in small-cap and mid-cap funds through SIPs with a 3-5 year investment horizon, the experience may not be as pleasant or rewarding as anticipated. It is recommended to have a longer horizon of 8-10 years or more when investing in these funds to achieve significant SIP returns. This strategy allows for the benefits of compounding and helps to mitigate risk through the rupee-cost-averaging feature of SIPs.
To maximise the advantages of SIPs, it is crucial to maintain a long-term investment horizon, choose funds that align with your risk tolerance and financial goals, and remain disciplined in your investment approach. Unfortunately, many investors fail to follow these guidelines and often engage in panic selling.
For investors with a long-term mindset, remaining invested and refraining from making rushed selling decisions during periods of high volatility has consistently demonstrated its advantages throughout history.
To gain exposure to small-caps, investors can choose either flexi-cap funds or dedicated small-cap funds. Dedicated small-cap funds are preferred by those seeking high returns, as flexi-cap funds may reduce their small-cap exposure as they increase assets under management. Flexi-cap managers may also adjust their small-cap exposure based on market volatility predictions, which may not always be accurate.