Do Not Ignore Investing In Mid-Caps And Small-Caps

Looking at the rapid rise of the Indian equity markets over the last one year, it is quite likely that you too are looking forward to investing in the markets. One of the best investment instruments through which you can take exposure to equity markets is the mutual fund route. However, beyond this point comes the tough part. What type of mutual fund should one choose? What category of mutual fund offers the best growth potential? Answering these questions is no easy task. In simple terms, the risk versus returns contest is one of the easiest ways to decide these answers.

Accordingly, higher the risk, higher is likely to be the return and vice versa. So, depending on one’s risk appetite and the investment horizon, one can choose a fund which aids in meeting one’s financial goal. If the investment horizon spans across multiple decades and if one has a higher risk appetite, mid-cap and small-cap funds can be among your considerations. But first, what are mid-cap and small-cap funds? As per the official categorisation by the Securities and Exchange Board of India, mid-cap companies are those that rank between 101 and 250 among the publicly listed companies as per the market capitalization.

Accordingly, mutual fund schemes that predominantly invest in the equity of these companies are called mid-cap mutual funds. As per the market regulator, these funds have a mandate to invest a minimum 65 per cent of their assets in mid-cap stocks. Similarly, a company is considered small-cap when it is ranked from 251st onwards in terms of full market capitalization and just like a mid-cap fund a small-cap fund too will invest a minimum 65 per cent of their assets in small-cap stocks.

Why Consider Mid-Cap and Small-Cap Funds?

Historically, mid-cap and small-cap stocks have given returns that are far more superior when compared to large-cap stocks. For instance, Rs1 crore invested in Nifty 50 in March 2005 would have become Rs7.1 crore, which is an impressive growth. But if the same was invested in Nifty Mid-Cap 150, the amount today would have been Rs9 crore. It is not just on the index levels; most of the multibaggers in equity markets emerge from mid-cap and small-cap space. Data shows that in the last five years, 91 mid-cap stocks turned multibaggers registering 5x growth in share price. Moreover, in a growing economy like India, over long term (over a decade-plus) mid-cap and small-cap stocks tend to perform well in comparison to large-caps. One of the major reasons for this is that companies belonging to the mid-cap and small-cap space tend to be some of the biggest beneficiaries of structural reforms announced by the government.

Performance

The extended bull run in the Indian markets before the pandemic-induced correction had led many investors to raise concerns over frothy valuation of mid-cap and small-cap stocks. However, with the steep correction that took place in 2020, this anomaly is now addressed. Accordingly, this space is expected to perform comparatively better in the coming years as India reaps the benefits of the reforms that have been conducted by the government recently, like the productionlinked incentives. If you are exploring investing in the mid-cap and small-cap space, then it is recommended to invest through a mutual fund scheme. This will ensure that the portfolio being invested into is a well researched one and is diversified enough.

Invest Through SIP

To successfully manage risk in mid-cap and small-cap investments, it is best for an investor to invest in a regular and consistent manner. This approach ensures that the long tenure of the investment takes care of the risk as it gets distributed across the investment period. By investing systematically, one opens the door to generate higher returns as the companies continue on the potential growth path during the same period.

The writers are Directors, Proaffluence Associates Pvt Ltd
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