Asset managers do not expect the underlined stocks returning to their highs, even if the Nifty regained its peak
After a stellar performance over the past two years, the party seems to be getting over for mid and small-cap funds, with investors suffering major erosion in their holding value.
Midcap category gave an average return of negative 5.63 percent while small-cap schemes delivered a negative 7.75 per cent in the six-month period.
This is because both underlined indices BSE Mid-cap and Small-cap indices have fallen around 11 percent year-to-date. This is against a rise in BSE Sensex of around 5 percent during the period.
Poor financial results
According to analysis by Moneycontrol Research, a total of 34 companies in BSE Midcap Index have reported a decline in profitability compared with 29 companies in Jan-March quarter.
Similary, the smallcap index shows that while 137 companies reported a net loss in Q3 quarter, the number has shot up to 155 in the last quarter.
Fund managers also attributed the sharp fall in the mid- and small-cap sectors to a combination of several reasons - selling by domestic and foreign investors, unsustainable high valuations, decreasing rupee value against dollar, a sharp increase in the crude prices and uncertain global cues including geopolitical concerns. The rebalancing of holdings by mutual funds to align with new classification by Securities and Exchange Board of India, has also contributed to the fall.
"The primary reason behind the fall is the SEBI’s guidelines on mutual funds re-categorisation,” said a fund manager from a bank-sponsored fund house. “This move has resulted in the mid-caps and small caps being moved out of the schemes beyond the allowed limit,” the fund manager added.
Market regulator SEBI has demarcated a total of 36 categories under five broad groups to enable investors to select mutual funds with greater ease.
It also defined the individual characteristics of each of the scheme types and what the portfolio allocation should be. For instance, a large cap fund should invest at least 80 percent in large cap shares and a mid-cap fund should invest at least 65 percent in mid cap shares.
Asset Managers do not expect the underlined stocks returning to their highs, even if the Nifty regained its peak. They believe these stocks may underperform the broader indices.Not sure which mutual funds to buy? Download moneycontrol transact app to get personalised investment recommendations.