Is It A Good Time To Invest In Midcap And Small cap Funds?

The equity market is never meant to take a straight-line trajectory. It always has its shares of ups and downs based on a number of other factors like the general economic and political conditions within and outside the country, the interplay of global capital markets, movement of the local currency and many other factors.

There are 5000 odd stocks listed on the Bombay Stock Exchange, there is a classification put in place to differentiate between the stocks based on market capitalization. For the uninitiated, market capitalization is the market value of all outstanding shares of a company.

According to changed norms for fund categorization, large-cap funds can only invest in Top 100 stocks by market capitalization, mid-cap funds can choose between the 100-250th stocks and small-cap funds from the 251st stock by market cap.

What Is So Interesting About The Mid Cap And Small-Cap Space?

The Upside of Mid & Small Cap Space

Is it only the market capitalization that makes mid-cap and small-cap space unique and interesting? Of course not!!

Mid-caps and small-cap space represent that universe of the stocks which are budding or has the highest potential for growth. These companies are in their expansion phases and often prove to be value buys. These companies are not very popular so there are a limited number of value seekers investing in this space.

In a phase when the market is growing, the mid-cap and small-cap stocks often perform better than the large-cap stocks due to their potential of growth. Similarly, the mid-cap and the small-cap funds that majorly invest in these companies do well than the large-cap peers.

No wonder there is a lot of interest in this space.

The Downside of Mid & Small Cap Space

The Mid& Small Cap universe has a number of green-horn companies.

While the management of large-cap stocks is seasoned and can better weather a crisis, midcaps and small caps stocks might still be reaching there. Also, these stocks can quickly go down when there is an economic crisis/bear phase in the market.

Therefore investment in this space is not free from risks as these stocks show higher highs and lower lows (volatility).

Although, Mid-caps and small-cap mutual funds are handled by experienced fund managers yet they cannot guarantee you lesser volatility.

Performance of Mid-Caps/Small Caps vis-a-vis large caps

All said and done each one of us looks to maximize our investments. So performance is a key factor.

We looked into the performance of BSE Large Cap 100, BSE Mid Cap and BSE Small-Cap indices over a 5 year period. This is considered as a proxy for Large Cap and Mid& Small Cap funds.

5 year performance of indices

We see that all 3 indices had a common base figure (almost) in 2013. While the index figure for Large Cap is just nearing the double-figure, the Mid-cap and Small Cap indices have moved way past that figure indicating growth in these stocks.

On the other hand, the volatility (ups and downs) for the Mid and Smallcap indices is also much higher when compared to volatility for Large Cap index. For Ex: Consider a one-year horizon from Dec 2017 to Dec 2018, the fall in mid & small-cap indices has been much more than the fall in large-cap, thereby validating our view of higher highs and lower lows.

Takeaways

There is no right or wrong time to invest in any fund. Every fund stands to satisfy a certain need like large caps allow lesser returns with lesser risk and it is the vice-versa for mid and small caps.

The time horizon for holding also matters. Investments in mutual funds generally pay well over longer time horizons.

One cannot totally shun or embrace the mid-cap and small-cap funds. The investments in these funds should be guided by your risk appetite, holding horizon and your financial goals rather than timing the market.

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