Mid- and small-cap funds have been in the spotlight recently, with some industry experts advising caution while certain fund managers argue they remain a good investment if approached strategically.
Some industry experts, however, refuse to accept that there is any controversy surrounding mid and small-cap SIPs. They say what the fund manager clearly mentioned was the importance of long-term commitment when investing in SIPs. The fund manager advised that SIPs should be done for longer terms like 10, 12, 15 years, and 20 years, not for short term because of the high valuations of mid and small caps.
“This is because short-term SIPs may not be able to make returns due to the market’s volatility. 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,” informs Anand K Rathi, co-founder of MIRA Money.
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Turing these cycles, SIPs work very well primarily because they are a great investment tool when investing in an up or down cycle. Consider the case of an SIP investor who started investing in a small-cap fund in 2018 when the market was at its peak. Despite the subsequent correction, the investor continued with the SIP, and by 2021, the fund had recovered, and the investor was sitting on a substantial gain.
Therefore, “contrary to what people think, I believe that SIPs will make more sense if the markets keep falling from here, especially small and mid-caps because the recovery is also faster. So, my suggestion is to keep investing in SIPs and, if the market falls more, increase the SIP amount so that when the cycle gets over, perhaps in 2-3 years or 4 years, you will make a handsome return, handsome double-digit XIRR returns,” adds Rathi.
Mahek Tomer, Founder & CEO, India’s Future Investors (IFI), says SIP remains a prudent strategy for those with a long-term investment perspective. “Investing in mid and small caps via SIP helps in cost averaging and mitigating short-term volatility. However, given the stretched valuations in some pockets, investors should be mindful of overexposure and ensure their portfolio is well-diversified.”
Investing in Small and Mid-Cap Funds
Whatever be the case, many new-to-market investors must be experiencing their first major market shake-up. In recent years, interest in mid-caps and small-caps has built up tremendously. These segments have also delivered tremendous returns. However, compared to large-caps, these segments have higher volatility. Keeping this in view, there are broadly three things investors should consider now.
One, “have a goal-based approach to mutual fund investing. This would help you align your fund pick with your goal. A typical goal can be defined as saving X rupees in Y years with an average annual returns expectation of R%. For example, saving up Rs 1 crore in 20 years expecting an average annual return of 12%. From this, you can work backwords and calculate that you must invest around Rs 10,000 every month to hit your goal,” advises Adhil Shetty, CEO, BankBazaar.com.
Two, when investing in mid- and small-caps, have a long-term view. This is where you get the best possible returns. While returns can be negative in the short-term, they are overwhelmingly positive for most equity funds over a five-year period.
Three, “diversify meaningfully. Invest in different asset classes and market segments. If you’re heavy on one class or segment, you experience concentration risk. Spread your money into equity, debt, gold, and real estate as per your goals for best results,” adds Shetty.
Return of Nifty Indices
| Index | Index | YTD | 1 Year | 5 Years |
| Nifty 50 | Price Return | -0.58 | 8.21 | 14.47 |
| Total Return | -0.45 | 9.58 | 15.82 | |
| Nifty 150 | Price Return | -6.10 | 10.99 | 24.41 |
| Total Return | -6.09 | 11.60 | 25.40 | |
| Nifty 250 | Price Return | -10.71 | 5.23 | 14.94 |
| Total Return | -10.69 | 5.89 | 26.04 | |
| Returns: Nifty Indices, as of January 31, 2025. | ||||
(Many mid-cap funds benchmark to the Nifty 150 Midcap Index, while many small-cap funds benchmark to the Nifty Smallcap 250 Index. The returns of the indices are similar to those of the funds benchmarked to them. Total return implies index returns with dividend, while price returns imply the latest price of the index. Source: Bankbazaar.com)
Equity Mutual Funds’ Short & Long-Term Returns (in %)
Equity: Large Cap
3-Month Return: -5.13
1-Year Return: 7.61
3-Year Return: 12.03
5-Year Return: 15.07
Equity: Large & MidCap
3-Month Return: -8.80
1-Year Return: 6.48
3-Year Return: 14.52
5-Year Return: 17.76
Equity: Flexi Cap
3-Month Return: -7.24
1-Year Return: 8.78
3-Year Return: 12.59
5-Year Return: 15.36
Equity: Mid Cap
3-Month Return: -9.68
1-Year Return: 8.89
3-Year Return: 17.59
5-Year Return: 21.60
Equity: Small Cap
3-Month Return: -11.62
1-Year Return: 6.40
3-Year Return: 16.54
5-Year Return: 25.06
(Source: Value Research)
Mid and small caps, thus, continue to offer great growth potential over the long term, but investors should enter with realistic expectations and a well-structured plan.
Disclaimer: Views, recommendations, and opinions expressed above are those of the industry experts and and do not reflect the official position or policy of FinancialExpress.com. Readers are advised to consult qualified financial advisors before making any investment decision.