Synopsis
If we look at the inflows in these two funds categories in the calendar year 2022, it is Rs 33,920 crore in mid cap funds and Rs 29,240 crore in small cap funds, which is 10.71% and 9.23% of overall inflows in equity funds respectively.
ET OnlineMid cap and small cap funds have become a part of many investors' portfolios over a period, particularly for those who have started investing recently. At the beginning of 2022, the mid cap and small cap companies had a phenomenal run for nearly two years. It is a natural tendency to invest in avenues that are performing well in recent times and the same can be seen in mutual funds, too.
If we look at the inflows in these two funds categories in the calendar year 2022, it is Rs 33,920 crore in mid cap funds and Rs 29,240 crore in small cap funds, which is 10.71% and 9.23% of overall inflows in equity funds (excluding Index Funds) respectively. Mid cap and small cap funds categories had the fourth and fifth highest inflows after sectoral funds, flexi cap and large cap funds.
While the rest looks good, a word of caution on the kind of flows we are seeing in the sectoral funds, these funds do carry much higher risk as they invest only in a particular sector or theme. Anyways, coming back to our topic on whether it is a good strategy to have a higher allocation in mid cap and small cap funds if you are a new investor. These funds do have the potential to generate additional returns for investors over the long run as many companies in the mid cap segment do have the ability to grow at a better rate than some of the well-established large companies. Hence, having an allocation in mid cap and small cap funds can be helpful and does have its merits.
Having said that, there is a possibility that mid cap and small cap can be more volatile when compared to large cap. This is one thing new investors should keep in mind and understanding its behaviour can be helpful. Below is the journey of how Rs 100 invested in small cap, mid cap and sensex 10 years ago would have been.
It is quite clear that mid cap and small cap have performed better, but the key is to have the patience to continue with the investments when there is a big surge or a fall in these investments. The idea should be to hold on when the funds are performing well and not exit just because it has generated much higher returns as there will always be a reinvestment risk on the withdrawn amount. Similarly, when there is a fall or correction one should try to add more to take advantage of such volatile times and not shy away during those times. As we can see in the above graph, the volatility of the red (Small cap) and blue (Mid cap) lines is much higher than the green line which represents BSE Sensex or the Top 30 companies in India and so is the growth prospect. Thus reemphasizing the significance of having a long-term view and patience while investing in mid cap and small cap funds.
ET Online| As on 1 Dec 2022 | CAGR | ||||
| YTD (Absolute) | 1 Year | 3 Years | 5 Years | 10 Years | |
| S&P BSE Sensex | 8.64% | 9.71% | 15.76% | 14.02% | 12.59% |
| S&P BSE Mid Cap | 4.57% | 4.72% | 20.07% | 9.28% | 14.23% |
| S&P BSE Small-Cap | 0.84% | 6.04% | 29.87% | 10.52% | 15.11% |
The above annualized returns from the index do show the potential of generating additional returns over the long run from mid caps and small caps. There will definitely be phases like 2022 and if we look at 5-year returns where large cap outperformed the mid cap and small cap Index. The key is to stay the course if you have invested in the right mid cap and small cap funds.
While the returns from these funds could be higher, one need not get carried away too much and invest very aggressively in mid cap or small cap funds. Building a mutual fund portfolio with large cap, index, large & mid cap and flexi cap along with these funds could be a good strategy. Depending on the risk appetite, age and goal period you can consider an allocation of 15 to 25% in mid cap funds and 5 to 10% in small cap funds. Ideally, investing in one or two good mid cap funds and one small cap fund in your portfolio could be a good strategy.
The decision to invest in mutual funds should not be just based on their recent performance. You must consider the long-term performance, particularly how they have performed during different market cycles. You can also look at the portfolio characteristics to understand more about how the fund has been managed. Gradually building the portfolio across different categories of funds could be a better way instead of investing mostly in a particular category.
There is no doubt about the potential of mid cap and small cap companies in a developing economy like India. We may see some of these mid and small-sized companies delivering higher returns for their investors, we should also keep in mind the additional risks they carry as well. Having a well-diversified portfolio across market capitalization can do a good job for its investors, where a sensible allocation in mid-cap and small-cap funds can play the role of generating additional returns.
(Harshad Chetanwala is the Co-Founder of MyWealthGrowth.com, a Mutual Fund Advisory firm based in Mumbai.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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