Should You Continue Your SIP in Small Cap Mutual Funds

"Our favourite holding period is forever." – Warren Buffett

In today’s dynamic market environment, where daily headlines often sway investor sentiment, it can be challenging to remain focused on long-term goals. This is especially true for investors in small-cap funds, who are currently witnessing significant volatility and market corrections. Recently, a surge of negative noise around small-cap funds has led many investors to question the wisdom of continuing their SIP (Systematic Investment Plan) investments, with some even opting to halt contributions or prematurely book losses. However, seasoned investors know that staying the course often proves far more rewarding than succumbing to short-term market emotions.

Understanding the Current Market Sentiment and Correction in Small Cap Funds

Small-cap funds, by nature, are more volatile compared to their large-cap counterparts. They invest in smaller companies that have the potential for rapid growth but also carry higher risk. Recently, several factors have contributed to a correction in the small-cap segment. Economic uncertainties, fluctuating market sentiments, and macroeconomic challenges have all played a role in shaking investor confidence. This correction, though unsettling, is a natural part of market cycles. It is important to remember that market corrections are not indicative of a permanent decline but rather a rebalancing of valuations and investor expectations. 

The Perils of Emotional Investing

When market volatility strikes, the immediate reaction for many is to panic. Opinions flood in from every corner—social media, financial news channels, and even casual conversations with friends and colleagues—often urging investors to exit their positions or abandon their investment strategies. This emotional response can lead to hasty decisions that are based more on fear than on a rational assessment of long-term goals.

Investors who halt their SIPs or rush to sell off their investments during market downturns often end up locking in losses. The very nature of SIPs is to build wealth over the long term through disciplined, regular investments that take advantage of rupee cost averaging. By stopping SIPs, investors miss out on the opportunity to buy units at lower prices, which, over time, could significantly enhance their overall returns. The noise and panic surrounding the market can create an illusion of crisis, but history has repeatedly shown that markets tend to recover, rewarding those who remain patient.

Staying Focused on Long-Term Goals

Long-term investing requires a steady hand and a clear vision. Instead of getting swayed by the short-term fluctuations of the market, investors should focus on their long term financial goals. Whether these goals are planning for retirement, funding a child’s education or buying a dream home, it is crucial to view market volatility as an opportunity to continue investing to reap the benefits of compounded returns.  

One of the best ways for navigating these turbulent times is to stick with a well thought out investment plan. Regular SIPs are designed to mitigate the risks associated with market timing. By investing a fixed amount at regular intervals, investors automatically purchase more units when prices are low and fewer units when prices are high. This disciplined approach can help smooth out the effects of market volatility and ensure that investors remain on track to meet their long-term financial objectives.

Embracing volatility When You Invest in Small Cap or Mid Cap Funds 

Despite the recent corrections and negative sentiment, small-cap funds continue to offer growth opportunities. Smaller companies are often at the forefront of innovation, and their growth potential can be substantial given their relatively smaller base in comparison to larger companies. For investors with a higher risk tolerance and a long-term horizon, small-cap funds can be an excellent component of a diversified equity portfolio. 

Let's look at the following Small Cap funds and their performance for an SIP of Rs. 10,000/- continued over a period of 10 years:

*value as on 21st February 2025

Major Events through the SIP journey of an investor in the past 10 years:

2016 – Demonetisation 
2020 – COVID 19 Pandemic 
2022 – Russia-Ukraine War
2024 – Imposition of Tariffs by USA & Correction in the Indian Stock Markets

The above representation demonstrates that an SIP in a Small Cap Fund, when continued with discipline, consistency and high goal orientation would yield results inspite of major events or market corrections. 

A periodic assessment ensures that your investments remain aligned with your risk profile and financial goals. Diversification can also help mitigate risks while still capturing the growth potential of small cap stocks. Rather than stopping your SIPs at the first sign of a market downturn, consider rebalancing your portfolio if needed, while still maintaining your long-term investment objective.

The Right Investment Behaviour

The essence of successful investing lies not in reacting to every market fluctuation, but in cultivating the right investment behaviour. This involves maintaining discipline, focusing on long-term goals and avoiding impulsive decisions driven by short-term market movements. Instead of allowing noise and panic to dictate your actions, trust in the fundamental principles of investing. Remember that every market correction is an opportunity—an opportunity to invest more prudently and secure future gains.

In conclusion, the decision to continue SIP investments in small cap funds should be guided by your long-term financial goals rather than the transient noise of the market. While the current corrections may seem alarming, they are a natural part of the market cycle. By staying disciplined, continuing your SIPs, and focusing on the broader picture, you position yourself to potentially reap significant rewards in the future. The journey of investing is a marathon, not a sprint and hence crossing each hurdle along the way is the key to achieve financial and investment success.

FAQs

Should I stop SIP in Small or Mid Cap funds given the recent correction?

You should continue with your SIP in spite of the market correction, as during a downward market cycle you are able to accumulate a higher number of Mutual Fund units. This would enable compounding to take place in your investments when the market rebounds. The importance of discipline, consistency and resilience will play a major role.

I am getting very jittery about the market and would like to redeem my losses. Is it the right time to do it?

It is virtually impossible to make an accurate prediction of the direction of the market. We believe that you should withdraw money from your investments only if you have a dire need or have your goal approaching. If your goal is long term, and you see a market correction, do not panic and stay consistent with your approach. The moment emotions start to take on your investing decisions, you are likely to make irrational investing decisions resulting in losses.

How can I make the right investment choice of investing in Small Cap Fund or Mid Cap Fund?

The ‘Dreams into Action’ is an ideal investing platform for personalised investing needs. We strongly believe that the investing process needs to be highly customised for an individual and should not be treated as a one-size-fits-all approach. Dreams into Action or DiA ensures that important conditions like an individual’s goals, ability to tolerate risk, household cash flows and investing expectations are taken into account before one starts investing in any Mutual Fund. Investing in Small Cap funds or Mid Cap Funds would purely depend on an in-depth understanding of these variables. You must consult an investment expert who would guide you and customise an investment plan for you and your goals.

Should I invest in a Small Cap Fund for 3 years?

It is recommended that investments in Small Cap funds should be done through an SIP and should be linked to your long-term goals. A goal that is for 3 years, does not suffice well for an investment in a Small Cap Fund.