"If you start an SIP and never stop, you don’t have to do much else." This statement perfectly captures the essence of long-term wealth creation through a systematic investment plan (SIP). The recent fluctuations in mid- and small-cap indices may make investors uneasy, but historical data from multiple market cycles shows that pausing or stopping SIPs during volatile phases often leads to missed opportunities and lower long-term returns.

"Mid- and small-cap stocks are inherently more volatile. Recently, they have declined about 16–17% from their peaks, but this is not unusual—they have historically gone through cyclical phases," says Chethan Shenoy, Director & Head of Product and Research at Anand Rathi Wealth Limited. "However, looking at historical rolling returns, there is a 99% probability of generating more than 8% returns if you have been investing for over 10 years. Similarly, mid-cap investments have a 95% probability of yielding more than 12% returns," he said.

"Following the recent decline, valuations in this category now appear reasonable, with negative froth in both mid- and small-cap segments. Earnings are expected to improve in H2FY25, with projected growth of 20–22% for FY25," Shenoy added.

Over the past five years, investing in mid- and small-cap funds has proven rewarding. Investors who followed a structured approach—systematic investing, diversification, and patience—have benefited significantly. However, sustained success in these segments requires discipline and a well-balanced strategy.

Atul Shinghal, Founder and CEO of Scripbox, said, "Market corrections of 10–20% in mid- and small-cap stocks occur roughly every 12–24 months. The key difference this time is that the correction is India-specific, unlike previous downturns driven by global factors. This is not an abnormal event—historical data shows such corrections are part of market cycles. We recommend staying invested and adding to positions during the current decline. However, given market dynamics, we suggest a slightly defensive allocation, tilting towards large caps and defensive sectors."

The S-T-A-Y Strategy for Mid- and Small-Cap SIPs

Shinghal outlined a four-point investment approach:

1. Strategic Asset Allocation (S)

• Maintain a balanced allocation across equities (large-, mid-, and small-cap) and debt.

2. Target Quality & Stability (T)

• Prioritise high-quality mid- and small-cap companies with stable earnings and reliable business models.

3. Allocate Gradually (A)

• Stagger new investments (or SIP increments) over time; avoid lump-sum entries at market peaks.

4. Your Patience Pays (Y)

• Resist the urge to stop SIPs due to short-term volatility.

"Investors are advised to diversify their portfolios across asset classes, fund categories, and asset management companies (AMCs) to reduce concentration risk. A market cap allocation of 55:25:20 in large-, mid-, and small-cap stocks, respectively, helps manage volatility while maintaining portfolio stability. Mid- and small-cap stocks should be part of the portfolio, but they should not constitute the entire portfolio," Shenoy added.

While there is no one-size-fits-all rule, historical data—whether from the 2008 financial crisis, the 2020 pandemic, or various 7- and 10-year rolling SIP studies—consistently highlights one key takeaway: investors who remain committed to quality mid- and small-cap SIPs and avoid panic exits emerge stronger.