The average return of mid-cap mutual fund (MF) category is a negative of almost 15 per cent over the last 1-year. For most investors who had started investing in mid-cap funds over the last 24 months, the portfolio is deep in the red. Equity investors need to be aware of the fundamental working of the markets. The stock market is not a one-way street and the share price of stocks listed on the stock exchanges do not move only in any one direction or in a predictable manner. Markets are volatile in nature and that is how they are supposed to be – uncertain and unpredictable. Several factors including those which are internal to the company and even the external economic environment can play a role in determining the performance of the stock prices. Budget 2019 proposals on long term capital gains tax could be only one of the factor.“There has been a marked slowdown in loan sanctions from NBFCs (down 31 per cent for the quarter ended March 2019 versus a year ago) which is resulting in a decline in credit availability across the board. Auto sales have declined sharply, and overall economic growth is suppressed,” says Kunal Bajaj, Head – Wealth Management, Mobikwik.
Importantly, the average compounded annual return for mid-cap mutual fund category is better over the longer period, 4.09 per cent over 3 years, 10.51 per cent over 5 years and 14.85 per cent over 10 year period respectively.
The portfolio of several investors especially who had started investing in recent times are in deep red. The erosion of wealth that they are witnessing now would never have been expected by most of them. Should they remain invested or leave the mid-cap bandwagon mid-way? “A lot of investors are concerned especially with the uncertainty in the economic environment. Having said that, it is important for investors to note that any equity investment will have its share of volatility and it is only those investors who can hold on during stressful times are able to generate significant returns over the longer term. My advice to investors would be stay invested,” says Suraj Kaeley, Senior Advisor, FundsIndia.com.
In fact, the investor needs to make use of the low prices now and average out in the long run. “Existing investors should stay put for a rebound in the mid-and-small cap sector. It does not make sense to buy high and sell low. In fact, investors should be steadily increasing their exposure to these funds in a small, sustained manner,” says Bajaj.
“It is difficult to predict where the markets will go from here but clearly over the longer-term mid-cap funds have the potential to deliver superior returns as compared to fixed income products,” says Kaeley. With several mid-cap stocks falling like nine-pins, the valuations at some point of time may look attractive. “It is virtually impossible to call a complete bottom on the market at any point in time. As valuations are now relatively cheap to reasonable, investors should start investing in these funds from now itself, in a slow and steady manner,” says Bajaj.
In fact, one should not base one’s decision to invest in mid-cap MF based on market situations. Mid-caps funds are relatively more volatile than large caps and only if your goal is far, allocate some portion into them based on your risk profile. Consider them to give a kicker of a return to your long term portfolio but be ready for big downsides over short to medium term. Remember, mid-caps are those which lag behind large-cap in terms of market-cap and are largely undiscovered by the market participants. “As a new investor, it is better to start with either hybrid or large-cap funds. If you can digest a higher level of volatility then you can consider investing in mid-cap funds as well. Since it is difficult to time the markets, setting up a Systematic Investment Plan (SIP) or a Systematic Transfer Plan (STP) would be a better option. Investing all your money at a point in time may be riskier and hence it is advisable to spread your investments over a period of time,” says Kaeley.
It is not the first time the economic conditions in the country are having a toll on the equity market performance. Over the long term, as government policies and reforms start giving results, corporate earnings improve led by job creation and consumption patterns. For equity mutual fund investors saving for goals which are at least seven years away, these times can turn to be wealth generator. “A slow down can be seen as a blessing in disguise as it allows investors to invest at relatively lower valuations and investors who are able to patiently tide over the crisis tend to generate superior returns in the long run.,” says Kaeley.