SIP in mid & small cap funds? We think the answer is clear!
It depends on your specific situations and investment horizon. Asset allocation is the key!
The biggest headline in the investing space last week was a bold take from a prominent fund manager advising investors to sell their mid and small-cap fund investments and stop their SIPs in them.
The fund manager was Mr Sankaran Naren, the Chief Investment Officer of ICICI Pru Mutual Fund, who has been in the mutual fund industry for more than three decades.
As Naren’s statement stirred things up, the CEO of Edelweiss Mutual Fund, Radhika Gupta pushed back. She defended SIPs, calling them a resilient product, and said investors shouldn’t stop just because someone says so.
Honestly, we love that these discussions are happening. They all are thinking about what’s actually good for investors (at least it appears to be).
But Naren and Radhika’s opposing views left many confused—should you stop or continue your SIPs in mid and small-cap funds?
The debate is still raging, with experts taking sides. But here’s what we figured out - both Naren and Radhika have a point, and it just depends on investors’ time horizons.
Let’s break it down.
Scenario 1: When Naren’s advice to stop SIPs makes sense
Naren is known for his contrarian investing style—he believes markets move in cycles and always tend to mean-revert. According to him, mid and small-cap valuations right now are just too high (“absurd,” as he calls it).
These funds have had a crazy rally over the last few years. To put things in perspective, mid and small caps funds gave an average of 50% returns in just one year as of February last year. No surprise that this kind of performance has attracted a flood of new investors.
Naren’s point is simple—when valuations are this high, the chances of getting good returns in the medium term (even up to 10 years) are low. He thinks it makes sense for investors to book profits and invest that amount in hybrid/flexi or large cap funds or even fixed deposits.
He also pointed out that while SIPs are a great product, investing in overvalued markets may not work well. He gave examples from the dot-com bubble and the 2008 financial crisis. Data from 1996-2001 and 2007-2011 shows that SIPs in mid and small-cap funds during those periods delivered either below 3% CAGR or even negative returns.
So, his argument does have merit.
Who can consider stopping SIPs?
(considering you assume that his outlook works out)
If you need money in the next 10 years: Mid and small caps can be volatile, especially at current valuations. If you need the money within the next 10 years, this might not be the best place to park it.
If you’re someone who can’t handle drawdowns: We might think we can tolerate periods of low or negative returns, but when it actually happens, the emotional stress can be much higher than expected. If you’re unsure whether you can handle it, this could be your cue to reconsider.
If your portfolio is already heavy on mid & small caps: If a big chunk of your investments is already in this category, reducing fresh investments could help. A diversified portfolio offers some cushion—when one asset class underperforms, something else can balance it out.
Scenario 2: When Radhika’s advice to continue SIPs makes sense
Radhika’s take is simple—SIPs are meant to ride through market cycles, not time them. Markets will go up and down, but history shows that investors who stay consistent tend to benefit in the long run.
That’s a solid point. Take ICICI Pru Value Discovery Fund and Franklin India Prima Fund (which focuses on mid-caps). They’ve been around since 2004 and 1993, respectively.
These funds have seen multiple cycles—from cheap valuations to frothy ones. But over the long term, spanning more than 20 years, their XIRR returns are close to good 19-20% (as of January 2025).
Another important factor—if you exit now, you don’t know when to get back in. Mid and small-cap rallies often happen in short bursts. If you’re not there at the right time, you could miss a big part of the gains.
Who can stick to their SIPs?
If you are investing for the long term: If your goal is still 10+ years away (the longer, the better), short-term market movements shouldn’t concern you.
If you don’t want to time the market: Most investors struggle with getting back in after exiting. Selling when things look expensive is easy—but timing the re-entry is tough. If you’re okay with market ups and downs, staying put makes sense.
If you have a diversified portfolio: If mid and small caps are just a part of your overall investments, there’s no need to overthink it. A balanced portfolio helps manage risk.
Conclusion
Like we said earlier, both Naren and Radhika make valid points. Their views might seem contradictory, but they actually apply to different types of investors.
At the end of the day, it all comes down to knowing your investment horizon, understanding your risk appetite, and sticking to sound asset allocation principles.
- Satya Sontanam
By the way, this picture is from our recent community meetup in Pune. Oh boy, the audience was so informed, and the energy levels were high! Thank you, Pune!
Great!
How can I be part of the community meetup in Pune?
nice work