Retail participation has grown multifold in the last three-four years, reflected in monthly new demat accounts and mutual fund SIP flows. About 45 per cent of the total net inflow within actively managed equity mutual fund schemes came in the small-cap funds and mid-cap funds category alone from April to December 2023.

The small-cap segment has outperformed the large-cap segment by a considerable margin in the last one year as Nifty Smallcap 250 TRI has delivered a 64 per cent return compared to a 27 per cent return by Nifty 100 TRI as on January 31, 2024. The question is whether you can invest in this segment now or wait for corrections. Secondly, with market itself at a high, should SIP investors wait for correction? Here’s answering these two questions.

Small-cap investing

If we closely analyse the historical data, we find that whenever the small-cap segment’s contribution to the total market cap is at a significant premium compared to its last 5-year average, the following 3-year returns from Nifty Smallcap 250 TRI are usually disappointing. For example, in December 2017, the Small-Cap segment’s contribution to total market cap was trading at a 30 per cent premium to its last five years’ average ratio; over the next three years, Nifty Smallcap 250 TRI delivered -3 per cent CAGR.

In contrast, if somebody would make an investment whenever the small-cap segment’s contribution to total market-cap trades at a discount over the last five years average ratio, usually the next three years’ returns are very satisfactory. Today, the small-cap segment contributes 18.9 per cent to the total market cap of the Indian equity market. This is an all-time high number and is significantly higher than last five years average of 13.3 per cent, a premium of 42 per cent.

SIPs at market highs

For long-term SIP investors, timing should not be the cause of worry while starting the SIP. One should be worried about it when approaching the harvesting phase of investment (near the financial goal).

Let’s assume one can predict the exact top and bottom and wants to start a long-term SIP. So, should that investor start SIP at the top of the cycle or the bottom? We did a detailed analysis using long-period data of S&P BSE Sensex TRI (last 27+ years). We took all those periods when equity market has fallen more than 20 per cent from its Top. The accompanying table is the investment summary of two investors, one who started a ₹10,000 monthly SIP at the top of various market cycles and the other at the bottom.

It is interesting to note that the % return is only marginally higher for SIPs started at the bottom of the market cycle. Even the marginal difference of % return shrinks further or goes away over the long term, irrespective of whether you started at the top or bottom (refer to the return difference for SIPs during the first 6 Market Cycles, i.e. in long term).


A genuine long-term SIP can be one of the many strategies to deal with potential volatility.In fact, it is prudent to use volatility to additionally deploy surplus investable money to take advantage of market volatility. That said, if one is investing in small-cap-heavy strategies today, there are an additional few things to be kept in mind: One, for lumpsum investment, one should expect moderate returns from here on over medium term. The recent performance delivered by the small and mid-cap segment should not be the base case while building future expectations from this segment. Two, investors should expect higher volatility. The small-cap segment, by nature, is a relatively more volatile segment.

The writer is Associate Director, Co-Head Product Strategy, WhiteOak Capital AMC