In times when markets fall, long term investors are less bothered and some even use low levels to average their cost of holdings.
Investors in mid-cap funds as compared to those in large-cap funds are a worried lot – Large-cap funds over a 1-year period, on an average, have fallen by around 7 per cent, while the mid-cap funds are down by almost 15 per cent! The return from a bank fixed deposit could have been anywhere around 7 per cent over the same period. Every time the stock market indices take a pause or dips, the investors who had just started their investing journey gets perturbed. New investors especially those who do not follow a proper selection process and make an investment in mutual funds (MF) on an ad-hoc approach find themselves on slippery ground. On the other hand, in times when markets fall, long term investors are less bothered and some even use low levels to average their cost of holdings. What should investors do now, should more be invested, what will make the mid-cap funds bounce back are some of the queries we posed to Rahul Jain, Head, Personal Wealth Advisory, Edelweiss in an e-mail interview.
What should the existing investors do now?
Investors who have already invested in mid-cap funds should hold onto them as the segment has already undergone a significant correction in price. Once the economic cycle improves, mid-cap funds are anticipated to deliver expected returns. In the meanwhile, it is important for investors to get their portfolio reviewed, to ensure that allocation to mid-cap funds is in line with their risk profile and investment horizon. Also, one should ensure that investments have been done in high-quality mid-cap funds.
Should new investors wait or invest now?
If one is new to the stock market, it would be prudent to make a larger allocation to large-caps funds. Once the investor is familiar with volatility and develops the appetite for higher risk, he can look at increasing his exposure to mid-cap funds gradually. Since it is difficult to predict when the market will favour large and mid-cap stocks, it is best to have a diversified portfolio comprising large, mid and small-cap funds. It will also depend on the investment horizon and risk appetite of the individual. Timing the market, by delaying investment by 6 months, may not be a good idea. Ideally, one should take the SIP route and invest in mutual funds.
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How risky are mid-caps compared to large-cap funds
Large-cap companies are more stable, have an established proven business model and predictable cash flows. Most of them are industry leaders. Besides, large-cap stocks are widely researched and relatively easier to forecast with regards to their future performance. Only if an individual has a longer investment horizon or an appetite for high risk, should he consider a larger allocation to mid-caps. If one has a low-risk appetite to volatility, then a larger allocation to large-cap funds would be more sensible.
With corporate earnings down, consumption level down and other economic factors impacting the markets, do you think Mid-Cap funds will be able to generate a decent return for the investors?
Mid-caps hold the potential to generate higher returns than large-cap funds, as they are in a better position to take advantages of economic recovery when it happens. The best strategy to invest in mid-cap funds would be through SIPs. To invest in mid-cap stocks, you should not only have a longer investment horizon, but also the ability and willingness to take higher risk. Also ensure that you research the mid-cap stocks and funds thoroughly, before investing.