After a period of continuous decline, the stock market is showing signs of recovery. However, financial experts are still uncertain whether the market has reached its bottom. Despite the market fluctuations, one thing remains clear: mutual fund investors should continue their systematic investment plans (SIP), particularly in small-cap and mid-cap funds.
Why SIP Investors Should Stay Invested in Smallcap and Midcap Funds
SIP investments help reduce the impact of market volatility by allowing investors to invest systematically over time. This approach ensures that investors buy more units when prices are low and fewer units when prices are high. In the current scenario, investors should also consider maintaining some cash reserves. This will provide them with an opportunity to invest in quality stocks at discounted prices in case of another market downturn.
Market Recovery and Investor Caution
Over the past two weeks, the stock market has witnessed a notable recovery. Smallcap and midcap funds have experienced the fastest gains, but it is essential to recognize that these segments also suffered the most significant losses in the past six months. Despite this, SIPs in these funds have continued steadily, driving demand and encouraging fund managers to remain active during market volatility.
Is the Market Rebound Sustainable?
According to Viral Bhatt, founder of Money Mantra, the surge in midcap and smallcap stocks indicates investor confidence. However, it is too soon to conclude that the market will not experience further declines. Kirtan Shah, founder of Credence Wealth, agrees that it is difficult to determine if the market has bottomed out. Nevertheless, he believes that smallcap stocks present attractive investment opportunities, whereas midcap stocks still appear slightly overvalued.
SEBI regulations mandate midcap funds to invest in only 150 specified stocks, leading to concentrated investments in this category. In contrast, smallcap funds offer a broader range of stocks, providing more diversification opportunities for investors.
SIP Strategy for Long-Term Investors
Investment experts recommend that SIP investors stay committed to their long-term financial plans, especially if they have a 4-5 year investment horizon. Bhatt emphasizes that SIP strategies perform well in fluctuating markets, ensuring that investors benefit from rupee cost averaging over time.
Performance of Smallcap and Midcap Funds
| Fund Category | 1 Week Return (%) | 6 Months Return (%) |
| Large & Midcap | 3.70 | -11.97 |
| Dividend Yield | 3.63 | -12.40 |
Source: Ace MF, Data as of March 25, 2025
Should Investors Invest Lump Sum Now?
Deepak Chhabadia, CEO of Axiom Financial Services, suggests that while the worst phase of the market decline may have passed, uncertainties remain. If any new negative events arise, the market could experience another dip. Therefore, he advises against making lump sum investments in smallcap and midcap funds at this stage.
Chhabadia explains that fund managers in these segments regularly adjust their strategies. They may reduce holdings in overvalued stocks and increase investments in companies with attractive valuations. This ongoing adjustment process means that fluctuations in these funds are expected.
For investors with significant exposure to smallcap and midcap funds, balancing their portfolio with flexicap and largecap funds is a prudent approach. This diversification helps mitigate risks associated with market downturns.
Key Investment Sectors to Watch
In recent years, several midcap and smallcap companies have demonstrated strong earnings growth. Sectors such as capital goods, auto ancillary, manufacturing, and specialty chemicals have performed exceptionally well. However, experts caution that many stocks in these sectors are now trading at historically high valuations. As a result, there is a possibility that their valuations may normalize over time.
Smart Investment Choices for DIY Investors
For investors managing their own portfolios, choosing the right stocks is crucial. Bhatt advises focusing on smallcap and midcap companies with strong balance sheets, stable cash flows, and professional management teams. He highlights that these segments are prone to liquidity shocks, meaning that during a global crisis or market crash, smallcap and midcap stocks tend to decline first and recover later.
Final Thoughts for SIP Investors
Despite market volatility, SIP remains a powerful investment strategy. By maintaining discipline and staying invested, investors can navigate market fluctuations while benefiting from long-term growth opportunities. Additionally, keeping some liquidity on hand allows investors to take advantage of buying opportunities when market corrections occur.
