Veteran fund manager S Naren’s comments have sparked a significant debate on SIPs, especially for the short-term in small and midcap funds. SIPs today are a very popular investment instrument. For the average investor, who wants a certain exposure to equities, the perception is that these seem to offer the perfect combination of risk and return. However, are SIPs the best way to deal with market volatility and maximise returns?
S Naren had raised the red flag on small and midcap SIPs at a recent event – the IFA Galaxy 2025. He had also indicated how sometimes fund managers have to balance the investment rationale with demands of the sales teams and business dynamics.
Here are some quotes from the talk that have drawn attention:
“Quote 1”
“We think it is a clear time to take out lock, stock, and barrel from small- and mid-caps”
“Quote 2”
“The entire risk is now borne by you (the distributor) and the investor – 100%. So, the entire problem of any loss will also be borne by you, 100%.”
“Quote 3”
“I do not believe that this is the time to invest in small and mid-cap SIPs. But I am unable to convince my sales colleagues. I tried my best but failed miserably. But I believe that this is the time to stop SIPs in small and mid-caps because they are so overvalued.”
Financial Express.com reached out to other industry stakeholders on their take about this key concern.
What’s the big worry in small and midcap SIPs
Many believe that the heavy demand for small and midcaps is what many fund houses look at optimising upon even when market conditions may not be favourable- Samir Shah,Head Online Business, Axis Securities explained, “Small-cap and mid-cap stocks have always been favoured by retail investors, who tend to gravitate toward these segments. Therefore, if there is customer demand, there must also be adequate supply. Consequently, despite the high valuations of mid-caps and small-caps, demand persists. Given the recent corrections in these sectors, many believe that valuations may have adjusted, making this a favourable time to invest.’
In fact, a quick look at key small and mid cap funds indicate that the returns over three and six months are in the red, significantly eroding investor wealth. Akhil Chaturvedi, CBO & ED, Motilal Oswal AMC highlighted that investments in mutual funds needs to planned and allocations in large, mid or small should be done in proportion to the risk appetite and time frame that the investor has in mind, “SIPs works best for very long term benefiting from rupee cost averaging. Indian investors have come of age and slowly adding equities to their over all allocation for better compounding and wealth creation. I always recommend flexi fund for investors who find it difficult to decide market cap basis allocation.”
It goes without saying that short-term SIPs in small and midcap are the big worry point.
The Distributor’s dilemma
This isn’t the first time that Naren has voiced concerns and cautioned investors either. As outlined by him in an interview to Moneycontrol in 2023,
“If you had done SIPs between 2006 and 2013, it would have delivered no returns. When I tell this to mutual fund distributors, they don’t even think it is possible. Where you invest is very important… So, if someone can stay invested for 20 years, then small and midcap are good places to be in, otherwise multi-asset products are better. And it is so difficult to convince people that small cap and large cap are more aggressive than large cap and flexi cap.”
Samir Shah of Axis Securities seems to corroborate the sentiment, “Distributors often face the challenge of advising clients on whether to increase allocations to these sectors that appear to have good potential, even when it may not be wise to allocate additional funds to mid-cap and small-cap stocks.”
SIPs flows, as result, have been doubling in the past few years. In fact, the Economic Survey data indicated that the SIP contribution upto December 2024 is over Rs 2 lakh crore.
Outlining the industry dynamics, Akhil Chaturvedi of Motilal Oswal AMC added that, “Our industry works at the conviction of the fund managers. Every firm’s fund managers will have their own investment frameworks and eventually, fund managers are active stock managers. Today, they will always try and ensure that they’re fulfilling a well balanced market cap budget. Any individual companies are there in the portfolio basis their fundamentals and growth opportunities. So in our case, I can tell you that in the short-term, we would ask investors to be cautious in the near term unless you have SIP for a very long term investor. On a five-year framework, we think that India is a promising emerging market. But in the short term, next three months, six months one should be careful. We have a large network and we don’t see pressure on the investment side.”
SIPs not the best for short-term
As per the Economic Survey, not only have the monthly flows in SIPs doubled over the last 3 years, over 10 crore SIP accounts were recorded in December 2024. The jump can be assessed from the fact that the total SIPs in the entire FY22 was a little over Rs 5 crore. While that indicates the trend, it is also a concern that over the short-term, especially when market sentiment is negative, the portfolio comprising of small and midcaps predominantly can easily go down over 50% giving an impression that one has clocked huge losses and it is best to exit the market. This is perhaps why we are seeing several small cap SIPs being halted in the past two months.
Industry observers indicate that when retail investors begin to withdraw, this puts additional pressure on managers, potentially forcing them to rethink their entire approach.
