Small cap funds are equity mutual funds that invest predominantly in companies ranked beyond the top 250 in terms of market capitalisation. These companies typically operate in niche sectors or emerging industries and have the potential to grow as they expand operations and gain market presence.
Due to their size, small cap companies may be more volatile than large or mid-cap firms. Their performance can fluctuate significantly depending on market conditions, economic cycles, and business fundamentals.
This nature gives small cap funds a higher potential for long-term growth, but also increases the associated risks. This is why they are considered more suitable for investors with a longer investment horizon and a higher risk appetite.
What happens when markets fluctuate
If you are currently investing in small cap funds through a Systematic Investment Plan (SIP), you may be wondering whether to continue, especially when markets are volatile or returns appear unpredictable.
Market corrections can affect small cap stocks more than large caps. This may lead to short-term underperformance of your portfolio. However, volatility also allows SIPs to work in your favour through rupee cost averaging. By investing consistently through all market phases, you may accumulate more units at lower prices, potentially improving the average cost of your investment over time.
Why long-term investing matters in small cap funds
Small cap funds generally require time to deliver their full growth potential. Over shorter periods (1 to 3 years), these funds can underperform due to market sentiment, liquidity pressures, or broader economic conditions.
Historically, the small cap category has shown that longer-term investments—typically over 7 years or more—have demonstrated relatively stronger growth potential, albeit with some fluctuations. Do keep in mind, though, that any historical information or past data should not be taken as an indication or guarantee of any future performance.
If your financial goals are long term (such as retirement or children’s education), continuing your SIP could align well with your timeline. However, it is crucial to assess whether your risk profile and financial plan still support the level of volatility associated with small cap funds.
How an SIP calculator can help
An SIP calculator is a useful tool to estimate the potential future value of your investments. By inputting your monthly SIP amount, expected rate of return, and investment tenure, you can project the corpus you may build over time. These calculators allow you to explore different investment scenarios, helping you make more informed decisions. It is important to remember, though, that these returns are not guaranteed, but only projections.
Let us say a hypothetical investor named Rakesh invests Rs. 5,000 per month in a small cap fund for 10 years. Using an SIP calculator with an assumed annualised return of 12%, his potential corpus at the end of 10 years could be approximately Rs. 11.2 lakh. This hypothetical example only illustrates how compounding and consistency can work in an investor’s favour. However, actual returns may vary significantly depending on fund performance and market conditions.
When should you consider reviewing your SIP
While long-term consistency is encouraged, there are situations when reviewing your SIP in small cap funds may be appropriate:
- If your financial goals have changed and you need funds sooner than expected.
- If your risk tolerance has reduced, especially after market downturns.
- If your overall portfolio is overexposed to small caps and lacks diversification.
- If your investment horizon is now short term, making volatility less tolerable.
In such cases, you may explore rebalancing options, including reallocating part of your SIP to other categories such as large or flexi-cap funds, based on your new goals.
Role of diversification
Relying solely on small cap funds may expose your portfolio to unnecessary concentration risk. Diversifying across different categories—such as large cap, mid cap, and hybrid funds—can help smoothen the overall investment experience.
While small cap funds may offer high growth potential, they should typically be a part of a broader, well-diversified mutual fund SIP investment strategy.
Tools to help you plan better
Apart from an SIP calculator, you may also explore:
- STP calculators – useful if you plan to shift from lump sum to systematic transfers.
- Lumpsum calculators – a great tool for estimating one-time investments.
- Goal planners or retirement calculators – to align investments with your life goals.
These tools can improve clarity and offer a more structured approach to mutual fund SIP investment.
Final thoughts
Continuing your SIP in small cap funds depends largely on your financial goals, time horizon, and risk profile. If you have a long-term view and can handle short-term volatility, staying the course may help you benefit from the potential growth of smaller companies.
That said, it is always advisable to review your portfolio periodically and consult with a financial planner or investment advisor before making changes. Personalised guidance ensures that your investments remain aligned with your financial needs and comfort level.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.