The Indian stock market has experienced a significant correction, especially in the small and mid-cap sectors. Many investors who have been benefiting from the strong gains in these areas are now facing unexpected challenges as prices have declined sharply.
Smallcap stocks have been hit the hardest amidst the ongoing correction in the Indian equity market. The BSE smallcap index has experienced a decline of 9% in just a week, with the Nifty midcap index also falling by 8.69% during this timeframe. An alarming 70% of small- and mid-cap stocks are currently trading below their 200-day moving averages, indicating a sustained period of selling pressure.
According to experts, the continuous decline in mid and small-cap stocks can be attributed to concerns regarding valuation, macroeconomic obstacles, and changing investor preferences.
Despite these challenges, most experts advise investors to maintain long-term investment strategies in order to maximise benefits. They emphasize the significance of long-term commitment when participating in Systematic Investment Plans (SIPs). The fund manager specifically stressed the importance of holding SIPs for extended periods, such as 10, 12, 15, or 20 years, rather than short-term durations, due to the elevated valuations of mid and small-cap stocks.
Edelweiss MF in a post on social media X said: "Stopping your SIP during a market downturn is like walking off the pitch because the bowler is on fire. The best innings are built by sticking it out!"
Selloff of midcap, small-cap funds
In a recent post, Radhika Gupta, CEO of Edelweiss MF, discussed the current conversation surrounding mid-cap and small-cap SIPs and advised investors to avoid making decisions based on panic. She emphasized the importance of sticking to disciplined, long-term investment strategies.
Gupta stressed the value of maintaining a well-balanced, diversified portfolio and recommended staying invested for at least 10 years or longer.
“The SIP was meant to be a simple savings-investment instrument for the common person. A fill it, shut it, forget it one because most people struggle to markets, market caps and SIPs,” Gupta said.
"Today, the volatility in the market is due to domestic and global factors. The Q3 earnings of FY2025 were not that great leading to a rise in volatility in the Mid-cap and Small-cap segments in the Equity market. On the global side, FII outflow in lieu of Japan’s carry trade started the FII outflows in Sep followed by China’s Economic Stimulus Package and US Elections and US treasury yields peaked, all these led to volatility in the market. Expectations of US tariffs are disturbing the inflows once again," said Chirag Muni, Executive Director, Anand Rathi Wealth Limited.
“Mid- and smallcap stocks experience sharp price swings, making them susceptible to high valuation risks during market corrections or periods of low confidence in the market,” says Atul Shinghal, founder and chief executive officer, Scripbox.
“If you look at the way mid- and small-cap function, it has a lot of volatility, with up and down cycles as high as 20-30%. If you look at small-cap history from January 2018 to March 20, it corrected by 55%, only to recover by over 150% in the next 2-3 years,” said Anand K Rathi, co-founder of MIRA Money.
Contrasting picture
In January, there was an increase in inflows to Small cap funds, totaling Rs 5,721 crore, compared to Rs 4,688 crore in December. Similarly, Midcap funds also saw a rise in inflows, reaching Rs 5,148 crore in January, up from Rs 5,093 crore in December.
Akhil Chaturvedi, Executive Director & Chief Business Officer, Motilal Oswal AMC, said the monthly MF numbers for January are similar to December 2024 without any major drop in SIP flows.
“If you see the flow last month, the flows to mid and small cap funds is about Rs 5000 crore, similar to December. So the flows are pretty stable in January, and we are seeing similar trend in the first 10 days of February too. There has not been any panic selling. The investors are continuing to buy on dips and we have not seen any halting of SIPs in the small and midcap section either. So the SIP number is actually pretty stable. As of now, the trend is positive and encouraging, and we are not seeing any panic selling in mid and small caps,” Chaturvedi told Financial Express.
Investing during market dips
According to Kaustubh Belapurkar, the director of fund research at Morningstar India, Systematic Investment Plans (SIPs) are usually established for a specific duration, with investors potentially reallocating their investments to other funds. Despite market fluctuations, net SIP additions have remained positive over the past year.
He added that SIPs continue to serve as a valuable tool for maintaining disciplined market participation, enabling investors to avoid market timing while grasping the risk/return dynamics. Despite recent market downturns, equity-focused schemes saw net inflows of ₹39,688 crore in January, highlighting the resilience of long-term investment strategies.
"During market dips, it is advised to stay put and continue your SIPs, as investing is a long-term journey. In case of a 5 to 10% market correction, one can try to invest in a lump sum in case of having ideal cash. We have seen the market tend to rebound in 6 to 8 months from its peak," Muni added.
"Diversification is the key in investment. Diversify your portfolio across all three market caps. The ideal market cap allocation would be 50-55% in large cap, 20-25% in mid cap, and the rest in small cap. This will help you ride volatility comfortably. If you have an ample amount of small caps in your existing portfolio, there is no need to go ahead and invest in new ones. You can realign your portfolio according to the ideal allocation of market caps," he further said.