Mid-cap and small-cap funds – Is Investing in Them a Good Long Term Investment Strategy?

  • Posted By : reliancesmartmoney.com
  • Friday Sep 01, 2017

Key Takeaways 

  • Small-cap & Mid-cap companies have market capitalization ranging from less than र 5000 cr to up to र 20,000 cr
  • These funds have outperformed large-cap funds in periods of market volatility affecting FII inflows
  • These funds are well-suited to SIP investing

What Are Mid and Small Cap Funds?

As the name suggests, small and mid-cap equity mutual funds invest primarily in small and mid-cap companies respectively, across different industry sectors.

Mid-cap companies are typically companies which have a market capitalisation ranging from र 5,000 crores to र 20,000 crores, and small cap companies have market capitalisation of less than र 5,000 crores.

Should you invest in them?

Small and midcap equity mutual funds are more volatile than large cap equity mutual funds. However, over a sufficiently long time horizon, these funds have the potential to outperform large cap funds.

A unique feature of the Indian equity market is our dependence on Foreign Institutional Investor (FII) flows. Since they typically invest in large cap stocks, and consequently large cap funds, they are affected by their activity (or inactivity) than small and midcap stocks. Subsequently, in periods of market volatility affecting FII inflows, small and mid-cap funds have outperformed their large-cap counterparts.

Similarly, small and mid-cap funds are well-suited to SIP investing (rather than lump sum investments) since SIPs enable investors to take advantage of compounding and rupee-cost averaging over the long term (i.e. for your fixed SIP instalment, you’ll buy more units for lesser price when market is low, and vice versa)

In a nutshell, small and mid-cap funds should form a part of your portfolio, and a staggered entry via SIPs averages out your risk and exposure. And the higher your risk appetite, the larger your exposure to small and mid-cap funds (age, stage-of-life etc. are important determinants of risk appetite)

While you may cherry-pick one or two large cap funds to invest in, spread your small and mid-cap investments over three or more funds. This way you’ll be invested in a wider range of stocks via different fund managers (who apply different selection filters) and be spreading out your overall risk.

An efficient mutual fund portfolio consists of a combination of large cap, flexi cap and small and midcap mutual funds, based on your investment objectives. If you are a savvy investor, you can switch between large cap and midcap funds, based on market conditions to get enhanced returns.

Else, as long as you periodically review the performance of your overall portfolio and are abreast with market developments, you, or your fund managers, are the best judge of the proportion in which to spread out your investments.

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