SIP Calculator: Planning a ₹5,000 SIP? Large-cap, mid-cap, or small-cap—where should you invest? Understand the calculations..
SIP Calculator: You want to invest ₹5,000 every month. The question now is: should you put it into Large Cap, Mid Cap, or Small Cap funds? There are differences between the three, and each carries a different level of risk. Therefore, do not make a decision based solely on which category delivered higher returns last year. SIPs are not meant for the short term; they require a long-term commitment.
What is the difference between the three?
According to SEBI's categorization, the country's top 100 companies by market capitalization fall under the Large Cap category. Companies ranked 101st to 250th fall under Mid Cap, while those ranked below that fall under Small Cap.
Category | Company Size | Risk | Suitable For
--- | --- | --- | ---
Large Cap | Largest companies | Relatively low | New investors and those seeking lower risk
Mid Cap | Medium-sized companies | Higher | Long-term investors
Small Cap | Small companies | Highest | High-risk investors
It is important to understand one more thing here: Large Cap does not equate to a "safe" investment. If the stock market falls, Large Cap stocks will fall too. However, they are generally expected to experience less volatility compared to Mid Cap and Small Cap stocks.
If you are starting an SIP for the first time
If you are investing in equity mutual funds for the first time, starting with Large Cap funds might be easier. Large companies generally have more stable businesses and established long-term track records.
However, this does not mean that returns will necessarily be low. Large companies can also perform well over the long term; you simply might not see as much extreme volatility.
Suppose the market suddenly drops by 15–20%. This decline might be more pronounced in Small Cap funds, whereas Large Cap funds might see a smaller drop by comparison.
Mid Cap for a 10–15 year horizon
Now, suppose you are between 25 and 35 years old, have a regular income, and do not need the saved funds for the next 10–15 years. You do not intend to stop your SIP even if the market falls. In such a scenario, mid-cap funds could be a great option for you.
Mid-cap companies are smaller in size but offer the potential for rapid growth. This is precisely why they carry higher risk.
Invest in small-cap funds with an understanding of the risks involved.
Small-cap funds consist of small companies. While you may find rapidly growing companies among them, not every small company goes on to become a large one. This is the biggest risk.
When the market is performing well, small-cap funds can surge rapidly. However, during a market downturn, the decline can be equally sharp. At times, one may have to wait a long period for a recovery.
Therefore, it is best to invest money in small-cap funds that you do not need in the near future. If you plan to buy a house in five years and will need that specific money, placing a large bet on small-cap funds would not be wise.
How can you allocate a ₹5,000 SIP?
If you wish to invest across all three categories, here is a simple approach:
Fund Category Monthly Investment Annual Investment
Large Cap ₹2,500 ₹30,000
Mid Cap ₹1,500 ₹18,000
Small Cap ₹1,000 ₹12,000
Total ₹5,000 ₹60,000
This is not a fixed formula; it can be adjusted based on your age and risk appetite. If you can tolerate higher risk, you might increase the allocation to mid-cap and small-cap funds. Conversely, if you prefer to avoid volatility, it might be better to have a larger allocation in large-cap funds.
What kind of returns can you expect?
If we consider the average annual returns over the past 15 years merely as an example, data from FundsIndia Research shows that large-cap funds delivered approximately 11.9%, mid-cap funds 17.2%, and small-cap funds around 14.7% annually. Based on this calculation, investing ₹2,500 in large-cap, ₹1,500 in mid-cap, and ₹1,000 in small-cap funds monthly would result in a total investment of ₹9 lakh over 15 years. Based on historical returns, this amount could grow to approximately ₹28.7 lakh—a gain of around ₹19.7 lakh.
**Investing in three funds isn't mandatory**
It is not essential to split the ₹5,000 across three separate funds. If you prefer not to decide when to increase exposure to large-cap versus small-cap stocks yourself, a Flexi-cap fund could be an option. Such funds have the flexibility to invest across large-cap, mid-cap, and small-cap categories.
This means you do not need to select separate funds for each category. However, even here, the choice of fund requires careful consideration. Do not buy a fund simply because it delivered excellent returns last year.
**What is the biggest mistake made with SIPs?**
Stopping the SIP as soon as the market falls. Suppose you started an SIP of ₹5,000. The market dropped, and you stopped investing out of fear. Later, the market rose.
This could increase your losses because, in a falling market, your ₹5,000 would have purchased more units. The very advantage of an SIP is that you continue investing every month, regardless of whether the market is up or down.
**Don't chase past returns**
Just because a fund delivered a 30% return last year doesn't mean it will yield 30% the following year. Similarly, if a fund had a bad year, it doesn't necessarily mean it will always perform poorly.
When selecting a fund, don't look only at returns. Examine its portfolio and expense ratio. Check the fund's vintage (how long it has been in existence) and consider the fund manager's track record.
Disclaimer: This content has been sourced and edited from Money Control. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
