A Speech That Opened Pandora’s Box: Small S(l)ip?

In an industry that often takes cues from the market, regulators, and occasionally seasoned investors, Sankaran Naren’s speech at the Independent Financial Advisors' Galaxy conference last week sparked a rare stir in the mutual funds space.

Naren, the Chief Investment Officer of ICICI Prudential AMC questioned the conventional wisdom around systematic investment plans, particularly in mid- and small-cap funds, and raised concerns about investor risk-taking.

Some of the comments he made included:

“Everyone says SIP, but if you do investment in SIP in the wrong product, you are headed for trouble…All the risk is taken by you.”

“SIP has to be done in undervalued asset classes... in volatile asset classes…if you do it in overvalued asset classes, you have only yourself to blame.” 

“I expect FIIs to start buying large-cap stocks in a big way again in India…That’s why I believe this is the best time to actually do SIP or STP (Systematic Transfer Plan) in large-cap oriented funds or hybrid-oriented funds…”

“ I am trying my best to communicate as truthfully as possible  without looking  at what happens  to our AUM  or anything else.” 

“So, I believe that investors who have started SIPs from 2023 in small and midcap, they're going to have a very bad, very bad experience. Is this a time to take out money from small and midcap? We think it is a clear time to take out lock, stock, and barrel from small and midcap.”

These perspectives warrant scrutiny.

SIPs are meant to address the very problem of over-valuation and under-valuation of market caps and the gyrations in the market by investing specific savings on a periodical basis to accumulate a targeted corpus for various financial planning needs. Their core premise is that timing the market is difficult, if not impossible. 

SIPs in mutual funds investing in small- and mid-cap stocks made more sense as short-term fluctuations are high and also frequent, but the risk-reward ratio is always in favour of outsized returns compared with large caps. 

According to a FundsIndia Research note from February 2025, small-cap stocks have always seen periodic corrections, with declines of approximately 33% in 2022, 11% in 2023, 14% in 2024, and a further 16% drop so far this year. Historically, corrections of 33% or more have tended to occur roughly once every four years in this segment. 

Mid-cap stocks have also experienced periodic declines, typically in the range of 15-25% annually, based on research by Ace MF.

Despite these fluctuations, mid- and small-cap stocks have delivered strong long-term growth. Over the past 15 years, they have generated returns around 7-8 times their original value, compared with 5.8 to 6 times for large-cap stocks, as per FundsIndia Research. This trend has resulted in mid- and small-cap funds outperforming large-cap mutual funds over the long run.

According to PrimeInvestor.in, the five-year return of the large-cap fund category has been 14.75%, whereas the mid-cap fund return and small-cap fund returns at a category level have been 21.38% and 25.10%, respectively. 

Against this backdrop, Naren's cautionary note about SIPs in small- and mid-cap funds at the IFA gathering was a surprise. As a seasoned market veteran and a highly respected fund manager, his remarks went beyond fund-specific discussions, touching on broader aspects of asset allocation and market timing—areas generally guided by financial advisors. This perspective has led to divergent viewpoints among distributors.

Naren’s remarks contrast with ICICI Prudential’s current product mix, which has focused more on balanced and multi-asset funds rather than aggressive small- and mid-cap SIP mobilisation. The messaging towards this has been consistent in monthly conference calls with distributors. The market share of ICICI Prudential is relatively low in small- and mid-cap categories. At the same time, it reigns supreme in those of balanced advantage funds and multi-asset funds. 

This raises the question of whether the Securities and Exchange Board of India should provide more explicit guidelines on the scope of fund manager discussions—focusing on their schemes rather than broader industry trends. 

To be fair to Naren, he can talk about his successful track record as fund manager of ICICI Prudential Value Discovery Fund (the largest value-style mutual fund in the country (₹484 billion), ICICI Prudential Balanced Advantage Fund (₹603 billion, second to HDFC), or ICICI Multi-Asset Fund (₹527 billion, the highest AUM for the category). By highlighting concerns over small and mid-cap valuations, Naren has drawn attention to ICICI Prudential’s limited presence in this segment, raising questions about potential conflicts in messaging.

In an industry that is driving a successful SIP campaign, which has now reached a critical ₹260 billion per month, holding its own against foreign institutional investor-ownership of Indian equities, there could have been other ways in which Naren could have raised red flags. For instance, there could be gating the inflows for small-cap schemes, which fund houses like Nippon and SBI routinely do. To be fair, ICICI Prudential has stopped accepting lumpsum purchases into both small-cap and mid-cap schemes since last year. It also significantly reduced the exposure of small caps in flexible cap schemes. But SIPs are still being accepted. 

Did any other fund manager raise red flags about this issue? Not really.

Interestingly, SEBI already took proactive steps last year by conducting stress tests across all small-cap mutual funds. Everyone had to disclose how many days it takes to liquidate their small-cap portfolio if there’s a liquidity issue. For the record, as per the Association of Mutual Funds in India’s website showing risk parameters, ICICI Prudential Small Cap Fund will take 16 days to liquidate 50% of the portfolio and eight days to liquidate 25% of the portfolio (assuming the bottom 20% of the portfolio for scrip liquidity). Hence, investors in small cap funds have an idea about both the price risk and the liquidity risks posed by SIPs or lump-sum purchases.

Considering the vintage of some of the older small-cap schemes, which completed 15 years, and several mid-cap schemes, which completed over 20 years, investors and advisors are well aware of the rewards and risks posed by investing in such funds. 

While a Black Swan event can wipe out a lot of net asset value gains, allocation to small- and mid-cap stocks has now become key to portfolio construction and asset allocation for long-term wealth creation opportunities. Swapping horses midway is not a great idea that the industry now recognises if it must grow its SIP book to ₹300 billion and beyond. The more volatile small- and mid-caps become, the stronger the need to commit to long-term SIPs to even out market fluctuations. 

SEBI could consider setting more explicit guidelines on the scope of fund managers’ discussions, focusing on their own fund’s performance rather than broader industry trends. While concerns about overvaluation are always open to interpretation, aspects like asset allocation and market timing are best addressed by the extensive network of advisors and distributors who specialise in these areas.

As for Naren, he has always been exceptional at big-picture analysis while being a great fund manager. He can talk about the significant trends and leave the micro trends to advisors and investors in that order. 

Mutual Fund manager hamesha sahi nahi hai.  Let the SIPs run!

*The author is a mutual fund distributor, and the views expressed are personal.

Also read: Counterpoint – MFs must not risk communication gap with investors