While small-and mid-cap funds have outperformed the Sensex, you should watch out for their volatile nature; invest only a part of your portfolio in them.
Investors in small- and mid-cap funds have a lot of reasons to celebrate. While the Bombay Stock Exchange (BSE) Sensex has risen 40.06 per cent in the last six months, small- and mid-cap indices have given returns of 70-75 per cent. The top performing funds in the mid-cap category have given almost doubled returns in the period.
According to data from Value Research, a mutual fund rating agency, Birla Sun Life Mid Cap Plan A and Sundaram BNP Paribas Select Small Cap have given over 80 per cent returns. Others, such as Religare Mid Cap, DBS Chola Mid Cap, UTI Midcap, Sundaram BNP Paribas Select Midcap Regular and Tata Midcap, had given returns of over 70 per cent as on November 16.
According to the rating agency, while large-cap stocks account for 70 per cent of the total market capitalisation of the BSE, the next 20 per cent is accounted for by mid-caps and the rest by small-caps. Schemes with less that 40 per cent investment in large-cap stocks are classified as mid- and small-cap funds.
Typically, mid- and small-cap indices tend to outperform the Sensex or the National Stock Exchange’s (NSE’s) Nifty in a rising market. This is because of presence of high beta stocks. That is, if the Sensex rises by 1 per cent, the mid-cap index could rise 1.5-2 per cent. Similarly, a falling market results in a sharper decline in these indices or schemes. As a result, investors need to exercise caution while investing in them. Experts say it is better not to invest all your money in such funds.
“Allocate 40-50 per cent of your portfolio for mid- and small-cap funds, but with a long-term horizon,” said Lovaii Navlakhi, managing director, International Money Matters. But even this is only for experienced investors.
More From This Section
For investors with not much experience, it is too easy to get lured by the impressive returns. Such investors should restrict their investment in such funds to 10-20 per cent of the total portfolio. And, those who are just beginning to learn the art of investing should stay away from these funds.
However, if you are keen to take advantage of the surge in stock markets, here’s some advice. For one, increase your allocation in a staggered manner. The simplest way is to go for systematic investment plans or systematic transfer plans. These help you set aside a fixed amount every month, thereby averaging out both market risks and fluctuations.
Besides having a disciplined approach, have a strategy. Nilesh Shah, deputy managing director, ICICI Prudential AMC, said, “While investing in mid-cap funds, one should look at the valuation gap between mid-cap and large-cap stocks. If the valuation of mid-cap stocks is lower than large-caps, there is a case for being overweight on mid-caps. The reverse is also true.”
Others suggested that one could also opt for diversified funds, which go for active churns. Their exposure to large-, mid- and small-cap stocks is not limited by any mandate.
Hemant Rustagi, chief executive officer, Wiseinvest Advisors, said, “The advantage with such funds is that the fund manager can change allocations according to market conditions. Hence, they are safer.”
At current levels, mid- and small-cap stocks are reasonably valued. And, as long as the economy is looking up, they are likely to outperform large-caps. “But this outperformance will not be consistent. There will be high volatility. Therefore, investors need a long-term horizon and the ability to average out to be able to fare well,” added Shah.
Yes, these funds are a great way to improve your returns. But do not change your asset allocation aggressively. Assess your risk profile and the time horizon before investing in such funds. And rebalance the portfolio once a year to realign the debt-equity mix.