Are SIPs suitable for large and mid cap funds?

With their flexibility, convenience and potential for long-term wealth creation, Systematic Investment Plans or SIPs are popular among mutual fund investors. For large and mid cap funds too, SIPs can aid disciplined investing and risk mitigation.

In this article, we will look at benefits and drawbacks of SIPs in large and mid cap funds along with factors you should consider before investing. SIPs allow investors to set aside a fixed amount of money at regular intervals in one or several mutual funds. Instalments can be as low as Rs 500 – some funds offer even lower minimum amounts. Small but regular investments can build wealth over time through the power of compounding.

Additionally, SIPs can help investors better manage market volatility through rupee cost averaging. When the prices of the underlying assets and therefore the Net Asset Value are high, the SIP instalment will be able to purchase fewer mutual fund units, while a lower asset price will enable the purchase of more units. Thus, the investor ends up buying fewer stocks when the prices are high, and more when they are low – which aligns with the traditional investment advice of buying low and selling high. Over time, this can potentially reduce the average per-unit cost, paving the way for higher returns.

• Table of contents

1. Benefits and drawbacks of using SIPs in large and mid cap funds
2. Factors to consider when evaluating SIPs in large and mid cap funds

Benefits and drawbacks of using SIPs in large and mid cap funds

SIPs for large and mid cap funds

As per SEBI, large and mid cap funds are equity funds that must invest at least 35% of their assets in large cap companies and 35% in mid cap ones. Equity investments carry more risks than fixed-income investments. The risk-mitigating features of SIPs can help better navigate market volatilities, especially in the long-term, through the following:

Encourages a disciplined investment approach: SIPs inculcate a disciplined investment approach, enabling investors to invest regularly without trying to time the market.

Rupee cost averaging: SIPs allow investors to average out market fluctuations, which can help reduce the impact of volatility on the investment portfolio.

Flexibility: SIPs offer flexibility in terms of investment amount and frequency, enabling investors to adjust their investments according to their financial goals and market conditions.

Investors may also perceive the following as drawbacks of SIP investments in large and mid cap funds:

Market volatility: Equity funds can be volatile in the short term, and investors may experience fluctuations in the value of their investments.

Lack of control: Investors may feel they have less control over their investments when using SIPs, as they are investing a fixed amount of money at regular intervals.

Inflationary risks: Investors should be aware of inflationary risks, as inflation can erode the purchasing power of their investments over time.

Factors to consider when evaluating SIPs in large and mid cap funds

Financial goals: Assess your financial goals and investment horizon before investing in large and mid cap SIPs. These funds can be suitable for long-term goals due to their growth potential.

Risk tolerance: Understand your risk tolerance and ensure that you are comfortable with the fluctuations in the value of your investments.

Asset allocation: Determine the appropriate asset allocation based on your financial goals and risk tolerance.

Fund manager expertise: Research the track record and expertise of the fund manager to ensure they have a proven history of managing large and mid cap funds.

Fund performance: Analyse the past performance of the fund to determine its consistency and ability to achieve higher returns relative to its benchmark.

Diversification: Investors should ensure that their investment portfolio is diversified across different asset classes, sectors, and geographies to mitigate risk.

Regular review: Investors should regularly review their investments to ensure that they are aligned with their financial goals and risk tolerance.

Conclusion

A long investment horizon is recommended when investing in large and mid cap funds through SIPs as these funds have the potential to deliver relatively high returns over the long term but can be volatile in the short term. Additionally, fund managers play a crucial role in the performance of large and mid cap funds. Therefore, investors should evaluate the fund manager's expertise and track record before investing in these funds. Examine your financial goals before investing and consider using a mutual fund SIP calculator to estimate potential returns and plan your investments. Additionally, consult a financial advisor when possible before making major investment decisions.

FAQs

What are SIPs and how do they work in large and mid cap funds?

SIPs are a method of investing in mutual funds, where investors invest a fixed amount of money at regular intervals. In large and mid cap funds, SIPs allow investors to invest in a diversified portfolio of large cap and mid cap stocks.

What is the risk associated with investing in large and mid cap funds through SIPs?

The returns on equity funds are linked to market performance and can be volatile in the short term but tend to stabilise in the long term.

Hence, large and mid cap funds can be suitable for investors that have a relatively high risk tolerance and an investment horizon of three years or more. A diversified portfolio can help mitigate some of the risks associated with market investments.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.