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Mid- & small-cap SIP returns beat all, but test nerves too

Mid- & small-cap SIP returns beat all, but test nerves too

30 Aug 2021

Mumbai: Systematic investment plans (SIPs) in mid- and small-cap funds have made more money for investors than in large-cap, flexi-cap and value-oriented schemes in the past 15 years. According to data from Value Research, schemes that invest in smaller shares have returned almost 40% on a compounded basis in the past three years, 23% in five years, 20% in 10 years and over 16% in the past 15 years.

For example, an SIP of Rs 10,000 every month in SBI Small Cap Fund, the best performer in the category, over a 10-year period, entailing a total investment of Rs 12 lakhs would be worth Rs 46.07 lakh today. In comparison, a similar SIP in a Nifty 50 index fund would be worth Rs 25.97 lakh.

“Smallcap funds usually comprise businesses that are in their early stages of development and have potential of high growth rates. With new sectors evolving, these funds get the opportunity to invest and participate in the journey of small to mid to large growth over the next 10-15 years,” said Pankaj Tibrewal, fund manager, Kotak Mutual Fund, who manages the mid- and small-cap funds.

It is not easy to stay invested in small-cap stocks over a long period because of the wild swings. While upsides in smaller shares are sharp, the declines are painful, say wealth managers.

“While it is good to see these returns over the long-term, even the best of investors tend to get scared of intermittent volatility in small-caps and tend to stop their SIPs when returns turn negative,” said Harshvardhan Roongta, CFP, Roongta Securities. He advises an allocation of 30% to mid- and small-cap funds with a holding period of 10 years for those who can bear volatility.

The most recent outperformance of mid- and small-cap funds have been driven by the rally in these shares since March 2020. In the event of a market sell-off, these shares appear most vulnerable to sharp declines, said fund managers. They believe there is still scope for fund managers to generate better returns in mid- and small-cap funds.