From little acorns, mighty oaks grow. This idiom emphasises how the smallest of actions today can potentially grow into something significant over time. That’s how SIP investments can potentially work.
When you set up a Systematic Investment Plan (SIP) in mutual fund, you’re essentially building a regular habit of investing. This can be particularly suitable for small cap funds, which offer long-term growth potential but also come with high volatility. An SIP not only helps you tap into that growth potential in affordable and convenient instalments but also mitigate the attendant risks to an extent.
Let’s take a look at what small cap funds are, and why SIPs can be a suitable way to invest in them.
Table of Contents:
Introduction to SIP in small cap funds
SIP stands for Systematic Investment Plan, a method where you commit to investing regularly in a fund of your choice. So, a small cap mutual fund SIP refers to investing a fixed sum at regular intervals (eg: monthly or quarterly) into a small cap mutual fund, instead of a one-time lumpsum payment.
The idea is simple: by investing through an SIP, you spread out your investment cost over time. What’s more, because you invest a fixed amount regardless of market conditions, you end up buying more units when prices are low, and fewer units when prices are high. This helps you potentially capitalise on dips and prevents you from overweighting your portfolio during market peaks. This also averages out your investment cost over time and mitigates the risk of timing the market. This is called rupee cost averaging and is a key feature of SIP investments.
What exactly are small cap mutual funds?
Small cap mutual funds focus on listed companies that listed 251 and beyond (by market capitalisation) on recognised stock exchanges. As per regulatory norms, such funds must invest at least 65% of their assets in these smaller-sized firms. This means your money is backing businesses that potentially have significant room to grow over time in their efforts to become mid or large caps.
While small cap funds offer the potential for outperformance, they also carry higher risks and are more volatile than large cap and mid cap funds, because of their emerging business models and leaner balance sheets.
Read Also: Should I start an SIP in small cap fund?
Why should you choose SIP for small cap funds?
Systematic Investment Plans (SIPs) in small cap mutual funds can allow investors to tap into the growth potential of emerging companies while reducing the risk of market timing. By investing regularly, even with small amounts, SIPs help average out costs and can potentially harness the power of compounding—making them suitable for long-term investments in the high-risk, high-opportunity small cap space. Moreover, the gradual investing methodology of SIPs can align with the long-term outlook recommended for small cap investments, because time is an important driver for compounded growth potential.
Key benefits of SIPs in small cap funds
SIPs in small cap funds carry very high risk, but they also offer the potential for higher returns over a long horizon.
High growth potential
Small cap companies are often in the early stages of expansion. As they scale, funds that invest in them can potentially earn returns.
Early entry into potential future market leaders
SIP investments in small cap funds allow early exposure to companies that have the potential to break into the mid or large cap space.
Rupee cost averaging
SIPs can potentially help smooth out market volatility over time. By investing consistently, investors buy more units when prices are low and fewer when they’re high, lowering the average purchase cost over time.
Tap in on innovation
Smaller companies often tend to be more innovative and flexible, allowing them to potentially take advantage of emerging trends or new technologies. This can translate into growth potential for funds that invest in these companies.
Diversity in portfolio
Adding SIP in small cap stocks to your portfolio can provide some diversification. Small cap SIPs can be a tactical part of a broader portfolio that also includes large caps, hybrid funds or debt mutual funds for relative stability.
Risks associated with small cap SIP strategy
While small cap mutual funds may offer the potential for long-term outperformance, they also come with very high risk. Investors should weigh these factors before investing.
Volatility during market swings
Small cap funds are typically more sensitive to market fluctuations or economic downturns compared to large cap and mid cap funds.
Liquidity risk
Small cap stocks may trade in lower volumes, which may potentially present a challenging situation for small cap fund managers to navigate. In volatile markets, investors may feel a liquidity crunch while exiting positions.
Financial instability
Small companies can lack the financial stability of larger companies.
Less public information
Small cap companies often don’t have the same level of analyst coverage or public information available, which can make it harder to assess their financial health and growth prospects.
Fund manager dependency
Performance can heavily depend on the fund manager’s ability to identify small cap stocks with strong fundamentals or growth potential. Sub-optimal stock selection or misjudged timing can lead to underperformance or potential losses.
How have these funds actually performed?
Small cap funds have the potential to outperform their large cap and mid cap counterparts over the long-term but with bouts of extreme volatility in the short to mid-term.
For instance, as on June 27, 2025, the category average 10-year returns* for large cap funds was 12.24%, mid cap funds was 16.13% and the small cap category average return was 17.43%
Source: AMFI. Returns are for Regular plan.
However, investors also need to account for the accompanying risk that come with this category. For instance, according to a recent study analysing rolling SIP returns* from April 2005 to March 2025, it was only in holding periods of 12 years and above that the Nifty Small Cap 250 TRI did not register negative returns at any point.
*Past performance may or may not be sustained in future
How to start SIP in a small cap fund
Starting a small cap mutual fund SIP in India is a straight-forward process. Here are the steps to get going:
- Complete KYC: Submit PAN, address proof, photo and verify identity to be KYC validated.
- Choose a small cap fund: Research fund track record*, fund manager’s experience, expense ratio and portfolio. *Past performance may or may not be sustained in future.
- Decide SIP amount and frequency: Pick a sustainable per month SIP amount, using an online SIP Calculator to see potential outcomes.
- Select investment platform: Register via the AMC website, aggregator platform, or CAMS/MFU for your chosen scheme.
- Choose your plan: Choosing a regular plan via a distributor may help by providing full-service support whereas choosing a direct plan might lower costs.
- Set up auto-debit: Authorise a bank mandate (UPI/net banking) so the SIP amount is debited automatically each time.
- Review and start: Verify all details, confirm registration, and your first installment will be invested on your selected date.
Simple ways to boost your SIP experience
Here are some tips for investors to optimise the return potential while mitigating risks efficiently:
- Invest for the long-term: Stay invested for a long horizon to potentially ride out short to mid-term volatility and potentially benefit from compounding.
- Stay consistent in downturns: Continue your SIP during market dips to be able to buy more units at lower NAVs and capture potential rebounds.
- Use a step-up SIP strategy: Increase your SIP amount with an increase in your income to potentially boost the corpus without straining your budget.
- Assess risk: Check risk-adjusted return metrics such as standard deviation, Information ratio and Sharpe ratio to assess the risk-return balance of the fund.
- Monitor and rebalance annually: Review performance versus peers and benchmarks each year, rebalancing if allocations get skewed.
- Avoid market timing: Resist tweaking or stopping your SIP based on short-term news.
Read Also: What are small cap funds?
Conclusion
There’s something satisfying about watching small, regular efforts build on themselves—whether it’s your fitness routine or your investment portfolio. A well-structured Systematic Investment Plan in a small cap fund can provide a way to partake in the potential growth of emerging businesses while mitigating risk.
Over the long-term, that disciplined approach can help chase potential returns without the stress of market timing. However, it's crucial to understand the risks involved as small cap funds are inherently riskier and more volatile than large cap or mid cap funds. So, it's important to have a long-term investment horizon and a very high risk tolerance.
FAQs
What is SIP in small cap mutual funds?
It’s simply a Systematic Investment Plan where you invest a fixed amount at other pre-defined) into a small cap mutual fund, averaging out costs and investing in different market conditions.
Are small cap SIPs suitable for long-term investment?
A long investment horizon is very important for small cap investments because of their volatility. The suitability of small cap as a category for investors depends on their risk appetite and goals.
How risky is investing in small cap funds through SIP?
SIPs can help mitigate the impact of volatility to some extent, but small cap funds remain a high risk category, especially in the short term.
Can I pause or stop my SIP anytime?
Yes, can modify, pause, or cancel your SIP by notifying your fund house or distributor. Typically, there are no penalties for doing so.
What’s a good amount to start with?
Many fund houses offer SIPs starting from Rs. 500 a month. The amount that is suitable for you depends on your goals, risk appetite, budget and broader investment plan. However, even small investments can potentially build up over time through consistency and the power of compounding.
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