Should you invest in small and mid-cap funds amid run up?

“Fresh exposure to can be avoided at this juncture. If the investor is over exposed to mid- and small-cap funds and have invested in the last 3 years, it is advisable to book profits. If one is investing through Sytematic Investment Plans and looking for over 5 years holding period, it is advisable to continue the SIP,” S. Sridharan, Head – Financial Planning, Wealthladder Investment Advisors told Moneycontrol.

Sridharan says the mid- and small-cap space is overvalued at present. The P/E of nifty midcap 50 is presently at 35. In the last three quarters, the midcap valuations started picking up from Mar-2016 and peaked in September-2016. In the month of Sep-2016, the nifty midcap 50 was at 69 and slowly it started reducing. The present P/E of 35 is also not in a comfort zone. Though this has come down, there are few stocks left in the midcap segment with the attractive valuation. As far as small-cap is concerned, the rally started in April 2016 and peaked in Nov-2016. The present P/E of Nifty Small-cap 50 is 60.Sridharan says apart from valuation, liquidity is a concern in the small & midcap funds. “The liquidity score on mid- and small-cap is 12 days on an average. That means the funds would take 12 days to liquidate the entire portfolio at this juncture. Few funds has the liquidity score as high as 25 days,” he said.

Himanshu Srivastava, Senior Analyst Manager Research, Morningstar Investment Adviser India, points out that the run up in the small- and mid-cap space, has made it increasingly difficult for fund managers to find investment stocks that would make a meaningful impact on the fund. “Illiquidity is also an area of concern for small- and mid-cap funds. During market downturn, it becomes difficult for the manager to offload illiquid stocks due to lack of adequate liquidity in the system. This can adversely impact the fund’s performance.

Rishi Mehra, CEO of Wishfin (previously Deal4loans), however, feels there may still be some steam left in the mid and small-cap space and one’s risk appetite should determine whether to buy into these funds. “If an investor wants to get into high return category then he has to consider high risk investment. Top rated funds in the mid- and small-cap category have delivered 30-37% return in last one to three years’ time. Generally mid- and small-cap cycle is tempting over a 3-5 year time frame, so still we have one to two years’ to get more value in the space,” Mehra said.