Mid, small-cap funds devoted to the long run

Over 3 years, mid-cap funds gave compound annual returns of 21%, versus nine per cent for large-cap schemes

During volatile times such as these, many investment advisors are telling investors to restrict fresh investments in mid- and small-cap mutual funds in preference of large-cap funds. However, a closer look at the performance of equity mutual funds suggests that mid- and small-cap schemes have generated better returns compared to large-cap funds over multiple time frames of three, five, and 10 years.

(Small cap refers to stocks with a relatively small market capitalisation. Market capitalisation of a company is the number of shares multiplied by the current price of those shares on the stock market.)

“The meltdown in mid- and small-caps is causing heartburn among investors. Some are thinking of playing safe in large-cap funds. (But) don't write off small-cap funds in a hurry,” says Dhirendra Kumar, chief executive of Value Research.

Over three years, mid-cap funds gave compound annual returns of 21 per cent, versus nine per cent for large-cap schemes. Over five years, large-cap funds delivered annual returns of 6.8 per cent, less than half of the 15 per cent offered by mid-cap funds.

Over 10 years, mid- and small-cap funds outperformed large-cap funds by over 300 basis points.

Kaustubh Belapurkar, director, fund research, Morningstar India, says, "It is not advisable for investors with a long-term investment horizon to move out of mid- or small-cap schemes. Over the long term, they have outperformed large-cap funds. The fund managers' views of shifting to large-cap funds in the current scenario may be because large-cap stocks are better valued now. "

Over the last one year, large-cap funds are down 13.6 per cent, but mid-cap and small-cap one are down only 5.4 and 3.2 per cent, respectively.

Kumar says, “Active fund management in India still has a long way to go. There will be a big opportunity as many mid-cap and small-cap companies turn into big companies. Some of these companies may become multi-baggers and you may miss out if you put all your eggs in the large-cap basket. Also, the large-cap space has become very narrow for fund managers to operate in.”

(A multibagger is an investment that has gained several times its original value. Each ‘bag’ represents your entire original investment. So, if you invested Rs 5,000 in a stock and your holding is now worth Rs 10,000, you have a two-bagger.)

Currently, there are over 450 equity-oriented schemes in India, with assets of over Rs 4 lakh crore. The assets under management have more than doubled in the past 18 months, primarily due to robust inflows in equity schemes.