Which is the smartest way to max small-cap fund returns?

Summary: Small-cap funds have delivered blockbuster returns and attracted massive investor flows in recent years. But if you're planning to invest now, a crucial question remains: should you make a one-time investment or go the SIP route? We crunched the numbers across multiple small-cap schemes and found a surprising pattern — one that flips completely when you zoom out to 10 years.

Small-cap funds have been the toast of the town for quite a while now. Over the last few years, these funds have delivered exceptional returns, drawing the attention of return-hungry investors. As the small-cap rally picked up steam, so did investor flows, with these funds receiving net investments of over Rs 24,700 crore in the first six months of the year.

So, if you, too, are looking to enter the small-cap space now, here’s a more tactical question to consider: should you invest through a lumpsum (one-time investment) or a Systematic Investment Plan (SIP)?

Three-year returns

Over the last three years, small-cap funds have posted stellar performance. But when we compared SIP vs lumpsum investments across active small-cap schemes, a fascinating pattern emerged.

In 22 of the 23 active small-cap funds with a three-year history, one-time investors made more money than SIP investors. In some schemes, the margin has been quite significant, as you can in the table below:

The only exception? SBI Small Cap. Over this period, the fund’s SIP investors earned 19.58 per cent annually versus 15.54 per cent for lumpsum investors. One reason could be that the fund held a lot of cash at different times in the last three years, so one-time investments didn’t get fully deployed in the market right away.

But, there's a catch

Small-cap funds may look dazzling over the long term, but they can test your patience in the short term. Even the best-performing ones have gone through long stretches of underperformance.

Take Nippon India Small Cap Fund. Although it has been one of the top long-term performers, it delivered nothing, a diddly squat, for three straight years during the last decade.

It’s not alone, either. Many small-cap schemes, despite strong 10-year returns, have faced prolonged flat periods. These are not short dips; we’re talking about entire years when your investment could seem stuck in quicksand.

That’s why we at Value Research always suggest you invest in small-cap funds for at least seven to 10 years. Because lumpsum investors can be vulnerable to poor timing.

10-year performance

When we extended the lens to 10 years, the results flipped dramatically. SIPs outperformed lumpsum investments in all 12 small-cap funds with a decade-long record.

Why does this happen? A few reasons:

• Volatility: When markets fall or stay flat for long periods, SIPs keep accumulating units at lower prices, which pays off when a small-cap rally is underway.
• Mitigates timing risk: One-time investments are highly sensitive to when you invest. SIPs smooth out entry points.

Our take

If you're looking at a three-year window, and you strongly believe in a small-cap rally, a one-time investment might pay off. But that’s a risky bet, one that hinges on timing the market just right. At Value Research, we’ve always believed that consistency trumps timing. Even the best investors can’t predict market moves reliably.

That’s why we recommend long-term SIP strategy, especially when it comes to volatile categories like small-cap funds. SIPs help you average out your costs and stay disciplined through the market’s ups and downs. Over ten years, this disciplined approach has outperformed lumpsum investing across the board. In fact, even over five years, SIPs have had the edge: they outperformed one-time investing in all the funds.

Want to start a Rs 5,000+ SIP in a small-cap fund?

Your fund choice matters. This is where Value Research Fund Advisor comes in. We have a recommended list of small-cap funds, backed by decades of research.

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