 "Should you invest in mid-cap funds?")
Mid- and small-cap mutual funds have delivered returns of over 125% in two years, but most experts believe that it's time to take some money off the table and deploy it in large-caps where valuations look more comfortable
Mid- and small-cap mutual funds have delivered returns of over 125 per cent in two years, almost double the returns yielded by large-cap funds. Such huge gains have raised many eyebrows. The question being raised is, Are mid-cap funds worth investing in current times?
Though for an investor with a moderate risk appetite, mid- and small-cap funds are options to consider as they have the potential to enhance the return of an equity portfolio over a longer-tenure, it's time to review the risk taken thus far and if there is any room left for taking some risk. Given the returns, experts believe that it's time to take money off the table from the mid- and small-cap space, partially if not fully; and deploy it in the large-cap space - where valuations look more comfortable.
Dhaval Kapadia, director (Investment Advisory) at Morningstar Investment Adviser (India), says, "Mid & small cap companies tend to have potential for higher growth in business compared with large companies but are relatively less researched. The category has outperformed the large cap category by an annualised 2 percentage points over the last 10 years."
However, he adds that they are more sensitive to economic slowdowns and are also prone to higher risks of failure. "This leads to poor performance during market downturns and results in higher volatility for mid-cap funds. During bear periods of 2000-01, 2008 and 2011, mid-cap funds under-performed large-caps by anywhere between 2.2 percentage points and 5.7 percentage points on an annualised basis," he adds.
India's benchmark indices are already trading 10-15 per cent lower than their recent peaks. The domestic and external environment is not encouraging either. Fund managers have taken note of these developments and are maintaining a cautious stand in the relatively riskier investment segment.
Mrinal Singh, senior fund manager at ICICI Prudential AMC who is also responsible for managing the mid-cap fund, understands the undercurrent. He says, "Historically, we have seen that mid-caps being at a premium to large-caps, do not sustain for too long. Either the latter surge to correct the disparity or the former falls. Therefore, investors should now look at multi-cap funds that have a large cap tilt of around 70 per cent."
According to him, there may be a few opportunities in the mid-cap space, but "if you are looking for undervalued stocks, there are good opportunities in the large cap category."
Another risk which finds its association with the small- and mid-cap space is liquidity, and the lack of it during downturns tends to have a negative impact on fund net asset values. Fund managers are aware of this risk and do deploy various risk mitigating strategies like spreading the funds to a larger number of stocks, maintaining appropriate levels of cash, etc, but given the nature of the category, the risks are high. Experts say that the exorbitant returns made thus far from mid- and small-caps need to be protected.
Mid- and small-cap mutual funds have delivered returns of over 125 per cent in two years, almost double the returns yielded by large-cap funds. Such huge gains have raised many eyebrows. The question being raised is, Are mid-cap funds worth investing in current times?
Though for an investor with a moderate risk appetite, mid- and small-cap funds are options to consider as they have the potential to enhance the return of an equity portfolio over a longer-tenure, it's time to review the risk taken thus far and if there is any room left for taking some risk. Given the returns, experts believe that it's time to take money off the table from the mid- and small-cap space, partially if not fully; and deploy it in the large-cap space - where valuations look more comfortable.
Dhaval Kapadia, director (Investment Advisory) at Morningstar Investment Adviser (India), says, "Mid & small cap companies tend to have potential for higher growth in business compared with large companies but are relatively less researched. The category has outperformed the large cap category by an annualised 2 percentage points over the last 10 years."
However, he adds that they are more sensitive to economic slowdowns and are also prone to higher risks of failure. "This leads to poor performance during market downturns and results in higher volatility for mid-cap funds. During bear periods of 2000-01, 2008 and 2011, mid-cap funds under-performed large-caps by anywhere between 2.2 percentage points and 5.7 percentage points on an annualised basis," he adds.
India's benchmark indices are already trading 10-15 per cent lower than their recent peaks. The domestic and external environment is not encouraging either. Fund managers have taken note of these developments and are maintaining a cautious stand in the relatively riskier investment segment.
Mrinal Singh, senior fund manager at ICICI Prudential AMC who is also responsible for managing the mid-cap fund, understands the undercurrent. He says, "Historically, we have seen that mid-caps being at a premium to large-caps, do not sustain for too long. Either the latter surge to correct the disparity or the former falls. Therefore, investors should now look at multi-cap funds that have a large cap tilt of around 70 per cent."
According to him, there may be a few opportunities in the mid-cap space, but "if you are looking for undervalued stocks, there are good opportunities in the large cap category."
Another risk which finds its association with the small- and mid-cap space is liquidity, and the lack of it during downturns tends to have a negative impact on fund net asset values. Fund managers are aware of this risk and do deploy various risk mitigating strategies like spreading the funds to a larger number of stocks, maintaining appropriate levels of cash, etc, but given the nature of the category, the risks are high. Experts say that the exorbitant returns made thus far from mid- and small-caps need to be protected.