This Independence Day buy into Small & Mid-cap funds for the long term, but don’t overdo it
While the increasing investor interest in equities is great, investors should invest with a clearly defined risk and time horizon in mind, especially in Small & Mid-cap funds, which can tend to fall a greater extent if markets turn bearish in the short term
Since 2014, investors have enjoyed a golden run in the Indian equity markets, although this run has been punctuated with short-term bouts of volatility, investors have largely had a positive experience.
Investors have continued to pour in money into equity funds, with Small & Mid-cap funds getting a greater amount of attention from investors, partly on the basis of the superlative returns these funds have delivered during this period.
The share of Small & Mid-cap funds has almost doubled over the last 4 years.
Returns of Equity Funds (as on 10th Aug 2017)
Share of Small & Mid-cap funds as % of Overall Equity AuM
Should you invest in Small & Mid-cap Funds?
While the increasing investor interest in equities is great, investors should invest with a clearly defined risk and time horizon in mind, especially in Small & Mid-cap funds, which can tend to fall a greater extent if markets turn bearish in the short term.
2007-08 was a classic case in point, where Small & Mid-cap funds outperformed their Large Cap peers and attracted a fair bit of flows, only to correct sharply and witness large outflows from panicking investors in 2008.
But had you held on to your investments, they would have yielded great results, thus a long-term horizon becomes even more important with these funds.
Small & Mid-cap funds should definitely form a part of investor portfolios as they are one of the best avenues for long-term wealth creation, but investors should come with at least a 5-7 year investment horizon if not longer.
Investors who cannot digest interim volatility or have a shorter investment horizon may be better suited to stay invested in Large-cap Funds.
How to pick the right fund?
It is important to choose your Small & Mid-cap investments carefully. Small & Mid-cap stocks have great dispersion in returns over the short term which can lead to certain funds doing well over the short term but that may not necessarily be the case over the longer term.
Rather than picking the top performing fund over the last one year, look at picking a fund that consistently features in the top 2 quartiles. The Small & Mid-cap stock investment universe is fairly large, thus it is important to pick asset managers that have adequate resources to research and track these stocks to build a meaningful portfolio.
To sum it up, Small & Mid-cap funds are much-needed growth drivers in investment portfolios, but investors should understand the risks that are part of such investments and invest with a clear set of expectations.
Choose your funds carefully and stay invested for the long term. Allocation of these funds will depend on each investor’s individual risk-return and investment preferences.Disclaimer: The author is Director of Fund Research at Morningstar Investment Adviser. The views and investment tips expressed by investment experts on Moneycontrol are their own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.