As of mid-February 2025, small-cap mutual funds have experienced a significant downturn, with average declines exceeding 14% since the year’s start. Some funds are down by as much as 17%. This swift correction has left many investors questioning the future of their systematic investment plans (SIPs) in these funds.
However, despite the recent downturn, data from the Association of Mutual Funds in India (AMFI) reveals that investor interest in small-cap funds remains robust. In January 2025, inflows into small-cap funds rose by 22.6% month-over-month, totaling ₹5,720.87 crore compared to ₹4,667.70 crore in December 2024.
Venkat Chalasani, Chief Executive of AMFI, said, “Assets under management (AUM) of the domestic mutual fund industry increased to ₹67.25 lakh crore in January, a 27.52% growth year-on-year. Despite market volatility, SIP contributions remained robust, totaling ₹26,400 crore for the month.”
Small-cap mutual funds invest in companies with smaller market capitalisations, offering high-growth potential but also increased volatility.
Himanshu Srivastava, Associate Director – Manager Research, Morningstar Investment Research India, said, “Mid and small-cap fund categories, as well as categories with significant exposure to these two segments, continue to receive strong inflows, highlighting investors’ preference for this segment, largely driven by the high returns they have generated over the last few years. Since both segments witnessed a sharp correction, investors would have chosen to use this opportunity to enhance their exposure to these segments. However, investors should be wary of the inherent risk in these segments and be judicious while investing. Investment in mid and small-cap funds should be in line with their risk appetite.”
The Nifty Smallcap 100 Index, a benchmark for small-cap performance, declined by 13.73% for the month.
What should SIP investors in small-cap funds consider?
Amol Joshi, Founder of Plan Rupee Investment Services, says, “You must continue your SIPs. SIP investors are best served during market downturns when the same amount of investment buys more units due to lower NAV. Investors should be mindful of not allocating a significant chunk of their SIPs or portfolio solely to small-cap segments. Invest only with a long-term view of 5-7 years.”
It is also crucial to assess overall asset allocation. Just as one diversifies across equity, debt, and gold, equity investments should also be diversified across market cap segments. “A major chunk of your equity investments should be in large-cap or flexi-cap funds, with only a portion allocated to mid and small-cap segments. If these aspects are taken care of at the outset, market fluctuations won’t force you to change course,” added Joshi.
Moreover, investors must ensure that their investments align with their risk appetite and financial goals. Small-cap funds are inherently more volatile but can offer substantial long-term growth.