Mutual Funds: Should You Invest in Small-Caps or Mid-Caps?

Small-caps and mid-caps have experienced a sharp rally as the Nifty breached the 20,000 mark on September 11, 2023. Consequently, this outperformance of small-cap and mid-cap stocks has attracted significant mutual funds (MFs) inflows in both segments. 

So, as an investor, what should be the ideal choice between small-caps and mid-caps MFs?

In the past few years, systematic investment plans (SIPs) have emerged as a popular route to investing in MFs. In fact, SIP inflows have surged to Rs 15,814 crore as of August 31, 2023. 

The core advantage of SIP for an investor is that they get the benefit of averaging out the market volatility. Ideally, depending on the risk appetite, an investor should diversify their across-the-market capitalisations (m-caps).

Experts state that if an investor has a long-term investment horizon, which could be 10 years or above, then they should invest in large-caps. However, those with a higher risk appetite can consider some allocation in small caps. 

Diversification across m-caps is essential as it aids in lowering the risks as well as averaging out the impact of market volatility on an investor’s portfolio, say experts.  Moreover, an investor should avoid investing in mid-caps and small-caps MFs in case they are averse to taking risks, considering these are highly volatile and can be risky. 

However, it is advisable that an investor should ideally have an investment horizon of at least seven years to handle the impact of severe volatility and market shocks, which is true in the case of all equity funds. 

At the same time, it is important to review the portfolio on a periodic basis and take steps to make necessary changes if need be based on financial goals and risk appetite. 

SIP remains an ideal way for smart investing to achieve financial goals on a long-term basis. However, it is essential to determine the ideal SIP amount based on various factors while maintaining a disciplined approach to investing. 

On the other hand, in case an investor has been investing in small-caps and mid-caps MFs consistently for the past few years or has parked a lot of money in these funds, then they might want to book some profits and shift to liquid funds while slowly moving to equity, hybrid or large-cap funds. The condition is that SIPs must continue, though. 

Also, an investor should follow their asset allocation diligently. Typically, have 50-70% in flex-caps, including large-caps funds, and allocate the remaining to mid-caps and small-caps, as per experts. 

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