Tuesday, July 22, 2025

SIP vs. Lump Sum: What Works Best for Small-Cap Funds?

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So, you have come across the tidbits—small-cap funds are where the rising stars of the stock market are kept. But what are small-cap funds? Small-cap funds are mutual funds that invest primarily in firms with a small market capitalisation; those ranked 251st or higher. Think of businesses going through their growth phase, hustling, and looking to become the next big thing.

While these funds explore companies full of potential, they come with a bit of rollercoaster vibes. Small-cap funds can shoot up quickly when markets are rising, but they also fall as fast when things get bearish. However, if you have a long-term investing approach and a decent risk appetite, these funds can be a surprisingly rewarding part of your mutual fund portfolio.

Now, when it comes to investing in them, you have two options. You can take it slow and steady with a SIP, where you invest a set amount every month, or you can go all-in with a lump-sum amount. While both strategies have their fanbase, it is important to know what you are signing up for. Let’s break down both of them.

When to Choose SIP for Small-Cap Funds?

A Systematic Investment Plan, or SIP, is a slow and steady approach. You put aside a set amount and invest it in a small-cap fund every month, rain or shine, regardless of market conditions.

Why can it be beneficial?

If you are a beginner investor or you are someone who does not want to stress over market conditions or timing, SIP investing will be your best friend. Due to the jumpy nature of small-cap funds, it is better to ease the ups and downs by averaging your costs. Think of buying mangoes throughout the season at different prices – you will not always get the best deal, but you will rarely overpay. Include this with the magic of compounding, and your savings can quietly build into something much bigger with time and patience.

When to Choose Lump Sum for Small-Cap Funds

A Lump Sum investment plan is when you invest a big amount all at once, instead of spreading it through. While this is a bold approach, it needs to be strategic to make the most of it.

Why can it be beneficial?

If you know how to read the market signs, spot decent opportunities and understand timings, lump-sum investing might be the thing for you. If the market is down and you forecast a recovery coming soon, it might be beneficial to lock in by investing a chunk of money at a lower cost and riding the rebound. Now, even if your timing isn’t perfect, staying invested for a longer period, say 7 to 10 years, will help you get higher returns in the future.

The Hybrid Approach: Combining SIP and Lump Sum

Now, it is understandable if you are unable to pick sides between SIP and Lump Sum. Both of them are good, depending on your risk appetite and market conditions. But what if I tell you that you don’t have to stick to one plan? A hybrid approach lets you combine both these strategies and enjoy maximised returns. Here’s how it works:

First, you need to set up a SIP Plan and invest methodically. This will ensure your flexibility by investing in small amounts while building discipline. Let’s say, after a few months, you got your bonus, and now you are looking to invest it. Now, you are going to study the market. If it is down and you sense it is going to recover soon, then you can invest a portion of your available amount as a lump sum while continuing the SIP every month. This way, you can capitalise on bear markets without going all-out.

Small-cap Mutual Funds sorted by Returns [1]

SIP ApproachLump Sum Approach
Fund Name5-year Return (p.a)Fund Name5-year Return (p.a)
Quant Smallcap Fund+30.40%Quant Smallcap Fund+49.97%
Bandhan Small Cap Fund+28.96%Nippon India Small Cap Fund+40.90%
Nippon India Small Cap Fund+27.08%Bandhan Small Cap Fund+37.52%
Invesco India Smallcap Fund+25.98%Bank of India Small Cap Fund+37.43%
Tata Small Cap Fund+25.70%Tata Small Cap Fund+37.39%

Conclusion

While small-cap funds can be volatile at times, they can provide exactly what you are missing in your mutual fund portfolio. But how you invest matters as much as the fund you are investing in. Monthly SIPs provide consistency, while Lump Sum provides you better rewards if you manage to time the market correctly. If you prefer a balance between the two, a Hybrid model might be the best for you. Invest smart!