This seems to be a very appropriate time to enter mid caps. However, keep these things in mind before investing in them.
Small and mid cap funds are high beta in nature and they are suitable for investors with fairly high risk-taking capacity. High beta means both the return potential as well as the associated risks are high. Hence, for investors who wish to aim for higher than market returns, these are the ideal options as far as mutual funds are concerned.
As far as the current market scenario goes, this seems to be an appropriate time to invest in small and mid cap companies. Though market timing is extremely difficult and subject to high probability of errors, yet an intelligent guesstimate of market trends is always useful in enhancing the portfolio returns. By various yardsticks, my estimate is that this year is likely to be a very bullish one for the broader markets. Firstly, the large and frontline stocks have already done very well over the last few months. Market sentiments and momentum suggest that this bullishness is set to last. The divergence between large caps and mid caps is at a historical high.
This divergence has already led to buying emerge in shares beyond the main indices. All these are signs that this bull market has more legs to go and the mid cap space is set to outperform. Therefore, for investors who understand the risks associated with investing in smaller companies, this is truly a great time to invest in them. Investing in these companies requires a lot of research and knowledge. Since a majority of investors do not have time, ability or access to quality research, they are better off investing through the mutual fund route.
While selecting appropriate funds which invest in smaller companies, investors must take the help of a competent financial advisor or do their own research. Important factors to consider are the relative outperformance of the scheme in comparison to its peers as well as the benchmark indices. Different bullish as well as bearish periods should be analysed to ascertain the schemes which have the best consistency of out performance. Size of the fund and it’s duration are other important criteria to help you zero in on the appropriate choice. Generally funds with relatively larger corpus and longer history are considered more stable and less risky. Expense ratio is another important factor as it directly impacts the return to investors. Avoid schemes where the fund manager or objectives have been recently changed.
Due to its volatile nature only those funds which can be kept aside for many years should be invested in mid cap stocks and funds. Also, SIPs offer even better returns on these funds as compared to the front line ones as higher volatility usually results in better rupee cost averaging. Lastly, do remember that these funds are not suitable for risk-averse investors.
To conclude, small and mid caps generally give very handsome returns and tend to outperform the large caps over a long period of time. This seems to be a very appropriate time to enter mid caps. Mid cap funds are somewhat easier to chose and invest rather than individual stocks in the same category. SIP in mid and small cap funds is a terrific way of creating long-term wealth. At the same time, this category of schemes is appropriate only for investors who can tolerate some risks in order to aim for higher returns.
(By Ashish Kapur, CEO, Invest Shoppe India Ltd)
(Disclaimer: These are the author’s personal views. Please consult your financial advisor before making any investment)