Mutual Fund Investors Worry as Small and Mid-cap Indices Decline over 5% – What Should You Do?

With recent declines in mid and small cap mutual funds, many investors are facing a crucial question: should you pause or continue your SIP (Systematic Investment Plan)? Small-cap stocks have dropped 18% in two months, while the mid-cap index has fallen 17.61% in eight weeks.

Since February 7, the BSE Small-cap Index has dropped over 6%, while the Mid-cap Index has declined by more than 5.3%. On Tuesday, Feb 18, 11.51 A.M. the BSE Small-cap and Mid-cap Indices stood at 44,269.85 and 39,548.89, respectively, compared to 55,750 and 46,675 at the start of the year.

Impact of Small-Cap Selloff on Fund Houses

Fund houses have been significantly impacted by the recent small-cap selloff. In January, the net assets under management (AUM) of small-cap funds dropped by ₹23,665 crore (7.19%), reaching ₹3.05 lakh crore, down from ₹3.29 lakh crore in December. Mid-cap funds also saw a decline, with their AUM shrinking by ₹26,600 crore (6.65%), dropping to ₹3.73 lakh crore from ₹3.99 lakh crore the previous month.

Overall, equity mutual funds experienced a decline of ₹1.1 lakh crore (3.26%) in net AUM, bringing it down to ₹29.46 lakh crore in January 2025. This highlights the vulnerability of mutual fund investments to market fluctuations.

Past Performance

While past performance is not always a reliable indicator of future returns, it can offer some perspective. The performance of mid and small cap mutual funds has been highly volatile. For example, in 2008, these funds witnessed a sharp decline of up to 70%. However, the following year saw a remarkable recovery with returns of 70%. Over the past 3 years, small and mid cap mutual funds have even delivered returns as high as 100%.

The key takeaway is that these funds often undergo periods of sharp corrections, followed by periods of significant growth. Such volatility is inherent to the nature of mid and small cap mutual funds, and it is something that long-term investors should expect and be prepared for.

Should You Invest in Mid and Small Cap Funds Now?

If you’re new to investing, the current market conditions might cause you to reconsider. With valuations being relatively high, it could be a good idea to carefully assess the timing before entering mid and small cap mutual funds.

If you’re investing with a long-term perspective, such as saving for your child’s education in the next decade, and your risk tolerance is suitable, mid and small cap funds may still align with your financial plan. For those who are already invested and have a balanced portfolio allocation of mid and small cap mutual funds , continuing with your SIPs might help you stay on track with your investment goals.

Conclusion

Investing in small and mid cap mutual funds requires patience, strategy, and a clear understanding of your risk tolerance. While the recent declines in mid and small cap funds may be disconcerting, they also present opportunities for long-term investors.

In the end, the choice to pause or continue your SIP in mid and small cap mutual funds depends on your personal financial goals, risk tolerance, and investment strategy.

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.