New highs in mid-caps worry analysts

Experts feel taking some profits off the table will be good for investors

The going has been good for investors in mid-cap funds for some time. With the mid-cap index hitting a new high a couple of times in the past few weeks (15,188 on August 19), investors have had a good opportunity to make money.

Even over a longer period, things have been good. An investment of Rs 1 lakh in a good mid-cap fund would have easily doubled by now. According to data from Value Research, the annual category average returns of mid-cap funds has been as much as 20.71 per cent in the past five years, far higher than the category average returns of large-cap funds at 13.48 per cent annualised returns for the same period.

The only trouble: Mid- and small-caps have a tendency to fall suddenly and sharply. Last year, there were two such instances: in August, the mid-cap index lost 13 per cent in 33 days. In April 2015, the index lost 10 per cent in 24 days.

Some experts are worried. “I think the markets are tiring. It is a good time to take some money off the table in mid and small-cap companies and funds,” says investment advisor Arun Kejriwal.

In fact, he believes it is a good time to take money off even large-cap funds if you are sitting on profits. Earlier this month, DSP BlackRock Mutual Fund decided to restrict flows into its top performing small-cap scheme – DSP Micro-Cap Fund. The fund house decided to not accept investments above Rs 1 lakh per investor daily in the scheme from August 10. Investors will not be able to register a daily systematic transfer plan or a weekly systematic investment plan. The timing of the move coincides with the sharp rise in mid and small-cap shares that has made it tough for fund managers to pick winners.

One of the reasons fund houses stop or restrict inflows is because they find it difficult to identify good stocks at reasonable prices in such inflated market conditions. “They also fear that a sudden fall in the market, and mid- and small-caps are quite prone to that, might lead to a lack of liquidity. That, added with redemption pressures, can really hurt a scheme,” says a fund manager.

According to Deven Choksey, managing director at K R Choksey, investors in direct stocks need to be careful. “Reduce holdings or book profits on stocks where the business is no longer supporting valuations. We have been taking such calls consistently,” he says.

For retail investors in mid-cap stocks and funds, the advice is quite clear. If you are sitting on good profits, say 30 per cent or more and have stayed invested for more than a year, it is a good time to book profits because these would be tax free. If you have don’t have significant profits and are invested for less than a year, then you might as well stay invested because the 15 per cent short-term capital gains tax will eat further into the little profits. But, at any point of time, do not get excited by the recent run up and exit your core schemes, large or multi-cap schemes, and invest more in mid or small-cap funds or stocks.