ICICI Pru CIO warns on small-caps, mid-caps: Is it time to exit SIPs in these funds?

In the calendar year 2024, mutual fund investors' investment via SIP route touched Rs 2.89 lakh crore.

With a sustained fall in Indian equities, most small-cap funds are showing negative returns on their one-year Systematic Investment Plans (SIPs) over the past six months.

This has left investors worried, as they have poured in close to Rs 35,000 crore into active small-cap funds in calendar year 2024, nearly double the net inflows into large-cap funds.

Speaking at IFA Galaxy 2025, an event organised by a Chennai-based mutual fund association, S Naren, Chief Investment Officer, ICICI Prudential Mutual Fund, advised caution regarding SIP investments in mid-cap and small-cap stocks. “We think it is a clear time to take out lock, stock, and barrel from small- and mid-caps,” he said.

Muted show

According to the latest Motilal Oswal Asset Management Company report, as of January 31, all broad-based indices were showing negative returns in the short term but remained positive over the one-year period.

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The Nifty Smallcap 250 Index has declined significantly by 11.68 percent over the past six months, though it maintained a positive return of 5.23 percent over the year.

The Nifty Midcap 150 Index has experienced a decline of 9.19 percent over the past six months, though it still shows a positive 10.99 percent increase over the past year.

The benchmark Nifty 50 Index has demonstrated relatively better resilience with a smaller decline of 5.78 percent over six months while posting an 8.21 percent gain over the one-year period.

SIP returns disappoint

According to data available with ACE MF, most of the small-cap, midcap and large-cap funds are showing negative returns for SIPs on a one-year period.

Around 58 percent of active large-cap funds have delivered negative returns for SIPs on a one-year period, while 55 percent of mid-cap funds showed a fall in investment value.

At the same time, 70 percent of small-cap funds have delivered negative SIP returns on a one-year period.

However, all market-cap funds have delivered positive returns for SIP investments on a three-year period.

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For this study, the following assumptions were made:

SIP amount: Rs 10,000; SIP date: 1st of every month; three-year SIP start date: February 1, 2022; One-year SIP start date: February 1, 2024; SIP end date: January 2025; Extended Internal Rate of Return (XIRR) as on February 7, 2025.

Should you stop SIPs?

Given the negative SIP returns, a lot of questions have been raised on the efficacy of this investment medium, which has picked up in a big way over the last few years.

In the calendar year 2024, mutual fund investment via the SIP route touched Rs 2.89 lakh crore.

According to Nirav Karkera, Head of Research at Fisdom, SIPs are designed for such volatility and drawdowns.

“There is no certain way to time the market. SIPs are made to optimise on certain declines like now. There is no reason why one should not continue SIPs. I feel SIPs must be continued as long as you have conviction in the strategy, the fund and the fund manager,” he said.

Radhika Gupta, Managing Director and Chief Executive Officer, Edelweiss Mutual Fund, concurred saying that the SIP is meant to be a simple savings-investment instrument for the common person. “...(An SIP is) a fill it, shut it, forget it one because most people struggle to markets, market caps and SIPs.”

“Don't fall for fear mongering or 10-day debates. Focus on finding a good manager and holding for 10 years, in a sensible balanced way,” she wrote in a note.

Time to rejig portfolios?

According to Pawan Bharaddia, co-founder, Equitree Capital, a SEBI-registered Portfolio Management Service (PMS), a lot of liquidity has gone into small-cap and mid-cap funds during the last two years which have elevated valuations in this genre beyond comfort.

“However, this is more prevalent in companies in the range of Rs 10,000 crore to Rs 70,000 crore market cap where one needs to be cautious even after the recent correction. As one looks at companies between Rs 500 crore and Rs 5,000 crore market cap, the valuation there is far more reasonable with much higher growth,” Bharaddia said.

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Further, as per Karkera, the outlook on small-caps and mid-caps remains cautious in the near to medium term.

“Portfolio rejigs are warranted if anyone needs the money in the near term. Then there should be some rejig in the favour of large-caps. For those with very near-term goals, there could be a case for derisking into fixed-income propositions as well,” Karkera added.