Is this the time to invest in small and mid-cap funds?

Almost a year ago, the mutual fund schemes were re-categorised to support investors in understanding the different fund categories better. The move was expected to guide investors in understanding the asset allocation of funds and simplifying the comparison of similar schemes.

A significant benefit of the re-categorisation is that it has reduced overlapping of schemes that have very minute difference with similar asset allocation. Many investors are still not sure of how a small and mid-cap fund is different from a multi-cap fund. Some investors believe both are the same and just that it has multiple names.

The primary difference is that small and mid-cap funds invest in equity shares of companies that are classified under small and medium market capitalisation while the multi-cap funds invest across equity shares of companies of all market capitalisations. Multi-cap funds help in diversifying your portfolio. 

Multi-cap funds increase their allotment towards a particular sector when it performs better. For example, when the markets shoot up, generally the share prices of small-cap companies go up. When this happens, the fund manager will allocate more towards small-cap companies as they are significantly affected by the market movements. 

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The markets are gripped by a bearish trend. Investors are worried about the ailing small and mid-cap funds. The small and mid-cap companies are badly hit due to recent economic and growth developments. Their growth is hindered as the lenders’ ability to lend has gone down due to the liquidity crunch prevailing almost since a year now. 

For the reasons mentioned above, small and mid-cap investors are considering moving their investments to large-cap funds as they are considered relatively safer. While doing that might offer you a temporary sigh of relief, you would miss out on the chance to buy more fund units when the prices are low. 

When the markets start picking up, the small and mid-cap funds will start performing better. The returns on these funds would be more than that of the large-cap funds as later is not affected much by the market volatility. Hence, staying invested in small and mid-cap funds with a long-term investment horizon is the need of the hour.

Indian markets have hit rock bottom. They can’t fall further, and the government is expected to boost the economy. India is expected to grow in the next decade and staying invested in small and mid-cap funds is a good idea as their growth is significant in achieving a USD 5 trillion economy. 

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