Should I Stop Investing in Small Cap Funds That Stopped Taking Lumpsum Investments?

With the current market conditions, especially in the small cap segment, many investors are facing a decision: should they continue their Systematic Investment Plans (SIPs) or stop investing further, especially since some funds have stopped taking lumpsum investments?

Understanding Small Cap Funds

Small cap funds invest in smaller companies with lower market capitalizations, often seen as high-risk but also high-reward options. Historically, these funds can offer significant returns when the market conditions are favorable. However, they can also be subject to more volatility.

Market Valuation and Timing

The markets are currently in a near-bubble zone, characterized by valuations that may be considered unreasonable. This can lead to concerns among investors, particularly those with automatic investment plans (SIPs), about whether to continue their investments or not.

When a fund stops taking lumpsum investments, it is often a strategic move rather than a cause for immediate concern. It could indicate that the fund managers are adhering to a disciplined investment approach, aiming to focus on potential opportunities rather than collect funds during what they perceive as a high market valuation.

Why Continue Investing Despite a Pause in Lumpsum Investments?

Despite the recent pause in lumpsum investments, it is wise to not completely halt your Systematic Investment Plan (SIP) in a small cap fund. Here are some key reasons why:

Prevent Missed Opportunities: SIPs are designed to take advantage of the compounding effect over time. By continuing your SIP, you are ensuring that you are not missing out on potential growth opportunities as the market conditions change.

Market Correction Prediction: The decision to pause lumpsum investments often comes from fund managers who believe the market is overvalued. However, it takes time for the market to correct itself, and these corrections can create buying opportunities. Continuing your SIP allows you to benefit from such scenarios.

Long-term Perspective: Financial markets are cyclical. By focusing on the long-term and maintaining a disciplined approach, you can weather short-term market fluctuations and benefit from the recovery phases.

Examples of Past Decisions

Historically, funds like Reliance Small Cap Fund, Nippon India Small Cap Fund, and Mirae Asset Emerging Blue Chip Fund have paused lumpsum investments during market peaks. These decisions were made to protect investor capital in the face of likely corrections. However, once the market conditions improve, these funds have resumed accepting lumpsum investments.

For instance, in 2020, Mirae Asset Emerging Blue Chip Fund restricted lumpsum investments to only 25,000 INR. This was a strategic move to manage the fund’s size and focus on optimal investment opportunities.

Conclusion

While it's natural to be cautious about market conditions and the actions of fund managers, deciding to stop an ongoing SIP during a pause in lumpsum investments does not necessarily align with long-term investment goals. Fund managers pausing lumpsum investments are often making a strategic decision based on their assessment of the market. Continuing with your SIP allows you to take advantage of this and weather out market corrections, potentially leading to better returns in the long run.

Remember, the key to successful investing is staying committed to your investment plans and maintaining a disciplined approach.

Thanks for reading, and we hope this guide helps you make an informed decision about your investments.