SIP in small cap funds: Is it time to stop or stay invested?

SIP is a popular method for long-term investment in mutual funds. Good returns are possible through SIP even during market fluctuations, even if investments start at market peaks. 

Over the past two to three decades, SIP has established itself as one of the best ways for individual investors to generate long-term profits through mutual funds.

The core idea of SIP was to help investors avoid market timing and mitigate the adverse impact of behavioral biases on their investments.

In this context, the current debate about stopping SIPs in small-cap funds seems irrelevant and avoidable.

The biggest correction in the history of the Indian stock market occurred in 2008. Interestingly, if an investor had started an SIP* in the Nifty Small Cap 250 TR index at the market peak in January 2008, the annual returns (XIRR) of such an SIP for 3 years, 5 years, 10 years, 15 years, and up to now (31-January-2025) would have been 27.97%, 9.23%, 19.86%, 14.05%, and 16.46% respectively.

Take the recent example from January 2018 to August 2019, when the Nifty Small Cap 250 TR index declined by over 42%. In this case, if an investor had started an SIP in the Nifty Small Cap 250 TR index at the market peak in January 2018, the annual returns of such an SIP for 3 years, 5 years (31st January 2025) would have been 13.60%, 19.39%, and 23.07% respectively.

This clearly tells us that it is okay to start SIP at the market peak. Looking at the performance of SIP in a low market situation, it will look bad even if you invest for a long time.