Why a SIP in Small Cap Mutual Funds is a waste of money and time

Here is why a simple SIP alone in Small Cap Mutual Finds is far from rewarding in the long term and is a waste of your resources

Published: April 11, 2020 at 11:29 am

Last Updated on April 11, 2020 at 11:29 am

Small Cap mutual funds are relatively new and came into the limelight after the market rally in late 2013. Looking at the stellar returns from this category in 2014, several SIPs were started, especially by young earners who told themselves that they had high-risk appetites that that “in the long term small cap fund would do better than large cap funds”. Here is why a SIP in a Small Cap fund is a terrible idea.

A second of wave new mutual fund investors joined in after 2016, and they were enticed by the high returns from small cap MFs in 2017 only to be frustrated ever since.

The trouble with a small cap fund is two-fold. One, they rise to extraordinary levels in a pretty short time and fall as fast – at the very least, this presents a buying opportunity. Two, they can take an incredibly long time to recover.


Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

The BSE Small Cap index took about nine years to reach it’s 2008 pre-crash peak.  Actively managed funds may have taken a shorter time, but this is because they could freely invest in midcap and large cap stocks.

The previous all-time high for the index was Jan 2018. Currently is it almost 50% down and could take years to get out of the water. Yesterday we reported Ten-year SIP Return of Most Equity Mfs is now less than 10%

Small cap Fund 10-year SIP Returns (9th April 2020)

SBI Small Cap Fund-Reg(G)14.99
DSP Small Cap Fund-Reg(G)9.15
Franklin India Smaller Cos Fund(G)7.26
Kotak Small Cap Fund(G)6.68
HDFC Small Cap Fund-Reg(G)4.64
Sundaram Small Cap Fund(G)3.76
Aditya Birla SL Small Cap Fund(G)3.12
HSBC Small Cap Equity Fund(G)2.99
ICICI Pru Smallcap Fund(G)2.94

Seven funds with a less than 8% return after a 10-year SIP should be enough proof that “disciplined investing” is these funds offer a reward far inferior to the associated risk. Smallcap funds are significantly more volatile than other diversified mutual funds.  The associated risk premium ought to be higher, but that is rarely the case.

A simple long-term SIP would not lower associated risks and simply rise and fall with the fortunes of the fund.  The reason why the 10-year SIP return is so poor can be found by inspecting five-year returns.

Let us break the ten-year journey (April 2010 to April 2020) into five-year segments: April 2010 to April 2015 and April 2015-April 2020.

Small cap Fund 5-year SIP Returns (April 2010 to April 2015)

SBI Small Cap Fund-Reg(G)33.78
HDFC Small Cap Fund-Reg(G)20.08
Sundaram Small Cap Fund(G)31.99
Kotak Small Cap Fund(G)25.83
ICICI Pru Smallcap Fund(G)22.74
HSBC Small Cap Equity Fund(G)25.66
Franklin India Smaller Cos Fund(G)35.51
Quant Small Cap Fund(G)10.16
DSP Small Cap Fund-Reg(G)35.16
Aditya Birla SL Small Cap Fund(G)25.06

The first 5-year segment gave stellar returns. However, since SIPs do not reduce risk, all these returns were lost in the next five years!

Small cap Fund 5-year SIP Returns (April 2015 to April 2020)

L&T Emerging Businesses Fund-Reg(G)-8.65
Axis Small Cap Fund-Reg(G)1.91
Union Small Cap Fund-Reg(G)-6.54
Nippon India Small Cap Fund(G)-4.76
SBI Small Cap Fund-Reg(G)0.98
HDFC Small Cap Fund-Reg(G)-8.72
Sundaram Small Cap Fund(G)-13.32
Kotak Small Cap Fund(G)-6.70
ICICI Pru Smallcap Fund(G)-9.36
HSBC Small Cap Equity Fund(G)-12.92
Franklin India Smaller Cos Fund(G)-11.52
Quant Small Cap Fund(G)-13.01
DSP Small Cap Fund-Reg(G)-8.39
Aditya Birla SL Small Cap Fund(G)-0.14

This is the reason why the ten year returns are so low. What went up doubly fast, came down doubly fast and stayed there! While this risk is present in all equity funds, it is more pronounced for small cap funds.

What should investors do?

  • Avoid Small Cap mutual funds. They are not worth your time and money.
  • At the very least, do not invest in them via SIP. Buy them when NAV is down (like now!) and sell when they provide enough gains.
  • Beware of mutual fund sales guys they would push small cap SIPs with the dream of huge returns
  • Sell them when any fund in the category closes the fund for lump sum purchase
  • Or consider using technical indicators like for instance with this market valuation analyser
  • This is a study on how to book profits from mid cap and small cap funds tactically
Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.

  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter with the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision-making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)