Category : New to Investing February 3, 20265 minutes read
Small cap mutual funds attract investors looking for higher growth by investing in emerging companies with relatively smaller market capitalisation. While these funds offer the potential for superior long-term returns, they are also subject to higher volatility and market risk compared to large-cap funds. Choosing the right investment approach is therefore crucial. Investors can enter small cap funds either gradually through Systematic Investment Plans (SIPs) or by investing a lumpsum amount at once. Each method differs in terms of risk exposure, market timing, and suitability for different investor profiles. Understanding these differences can help investors align their investment strategy with their financial goals and risk tolerance.
Small cap mutual funds in India invest in stocks of small cap companies. These companies are smaller than blue-chip companies and generally have a market cap below Rupees 5000 crore. Due to their financial assets and size, they are vulnerable to market volatility, and the performance of small cap equity funds can be severely impacted by external factors, making them a high-risk investment. While investors have the option to invest through Systematic Investment Plan (SIPs) or lumpsum, certain investment methodologies may be suitable for investors based on their risk appetite and investment horizon. In this blog, we will explore whether you should invest through SIP or lumpsum in small-cap funds.
Systematic Investment Plans (SIPs) are a type of investment method wherein investors can invest a small amount at periodic intervals in a small-cap mutual fund or any other mutual fund of their choice. Regular intervals can mean monthly, quarterly, annually, semi-annually, etc. The minimum investment amount through an SIP can be as low as ₹100. In SIPs, investors do not need to worry about timing the market or predicting market conditions to make investment decisions. Through SIPs, investors gain the benefit of Rupee Cost Averaging, where the principle averages out the cost of investments. During market dips, investors invest in more units, and when markets are high, investors invest in fewer units. As a result, short-term market volatility or fluctuations do not impact the potential returns from a small-cap fund significantly.
Systematic Investment Plans (SIPs) are also useful for gaining the benefits of compounding. In compounding, the principal amount and potential returns earned on it get reinvested. Over time, this reinvestment helps the investment grow at an accelerated rate, especially when investments are made consistently over time. Small-cap funds are long-term and high-risk investments, and SIPs in small cap funds may not only potentially reduce risk but also enable compounding. Thus, investors are generally recommended to invest through Systematic Investment Plans.
Start an SIP in Bandhan Small Cap Fund today and gain the benefits of compounding in the long run!
Lumpsum investment is a large amount of money that is invested at once. Returns from lumpsum in small cap funds depend on market conditions. As small cap funds are vulnerable to market risk and volatility, lumpsum investments may be a bit riskier than SIP. However, lumpsum in small cap funds may work if the market is timed correctly. As the amount is invested together, potential gains or losses may be amplified; thus, considering market timing is vital. Lumpsum in small cap funds is generally more suitable for experienced investors who can analyse market conditions and fund performance to time the market well and avoid losses.
| Parameters | SIP in Small Cap | Lumpsum in Small Cap |
| Meaning | Periodic small investments | One large investment |
| Market timing risk | Low | High |
| Benefits of Rupee Cost Averaging | High | Low |
| Impact of market volatility | Lower, as investments are spread over time | Higher, as the entire investment is exposed at once |
| Risk level | Moderate to High | High |
| Suitable for | Beginner or amateur investors | Suitable for high-risk, experienced investors |
| Flexibility | High. SIP can be paused, increased, or stopped at any time | Low. Amount is invested upfront |
Read more about SIP vs lumpsum!
Both SIP and lumpsum investments can be used to invest in small cap mutual funds, but their suitability depends on an investor’s risk appetite, market knowledge, and investment horizon. SIPs help mitigate market timing risk through Rupee Cost Averaging (RCA) and allow investors to benefit from the power of compounding, potentially. SIPs may be more suitable for disciplined investors or investors who receive a steady income and wish to make periodic payments, especially beginners or young investors. On the other hand, lumpsum in small cap funds have the potential to generate significant returns if the market is timed well; however, they carry high risk due to the fund’s vulnerability to market volatility. Therefore, investors seeking stability may prefer SIPs, while experienced investors with a high risk tolerance may consider lumpsum in small-cap funds during favourable market conditions.
Start an SIP in Bandhan Small Cap Fund today and gain the benefits of compounding in the long run!
