What investors of mid and small cap funds need to do in these market conditions?

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August 26, 2021 12:38 PM

Investing in the mid and small-cap is more long term in nature and such swings are an integral part of investing in these companies or funds.

mid cap funds, small cap funds, investors, returns, diversified fundsThe small-cap and mid-cap companies had a phenomenal run in the last one and a half years.

The recent scare in the stock market, especially in the mid and small cap segment, created a bit of a flutter among the investors. While the long-term returns in these funds are still in the green territory, the average returns over the last 1 month have turned negative for both mid and small fund categories. “The small-cap and mid-cap companies had a phenomenal run in the last one and a half years. One can look at booking some profit from their investment, particularly in the small-cap space. And if the allocation in these segments is limited, then they can continue to hold it. Investing in the mid and small-cap is more long term in nature and such swings are an integral part of investing in these companies or funds,” says Harshad Chetanwala, Co- Founder, MyWealthgowth.com

As an investor, you will have to be ready to accept relatively higher volatility in them compared to large-cap funds. Such companies are relatively under researched and largely outside the radar of big institutional players. The risk-reward ratio in them is, therefore, higher compared to large-cap funds with huge market capitalization.

Your exposure in mid-small cap funds should be as per your risk profile but generally it is suggested not to allocate a higher percentage of your portfolio into them. At times, when the mid-small cap stocks are the favorite in the market, the NAVs rise in quick time, thus tempting investors to go overboard in them.

“You can consider investing 10 – 20% of their overall investment in mid and small-cap funds, where the allocation towards small-cap funds can be restricted to around 5%, says Harshad.

Your total allocation into mid-small stocks may even be impacted if you are holding other diversified funds such as multi-cap or flexi cap schemes. Harshad shares an important thing to watchout for. “Keeping an eye on the allocation in mid-cap and small-cap companies in the overall portfolio is important as not just mid-cap and small-cap funds but other equity diversified funds also have some allocation in these companies. This can give a better idea of the total exposure towards mid-cap and small-cap companies.”

And, when it comes to the selection of the funds, the approach has to be the same while choosing any fund. Look only at the long term performance and see if the fund has consistently generated returns in different market cycles.

A common mistake that many investors make is to keep adding mid-small funds to their portfolio for the sake of diversification. The purpose of diversification may serve well if you check the top 3 sector allocation and top 5 stocks held by the schemes to avoid over-diversification. “Ideally, you just need 1 or 2 mid-cap funds and one small-cap fund in your portfolio, if you wish to invest in these funds. Adding more funds does not help as there is a lot of possibility of overlap in the universe of companies to invest in,” suggests Harshad.

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