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.
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