The runaway speed at which Indian stock markets have gone up this year has taken everyone by surprise. And the numbers speak themselves! Consider this. The S&P BSE Mid-cap Index has gone up by 54% while the S&P BSE Small-cap Index has soared by a whopping 73% (year-to-date as on Dec 8). Compare this with the rise in S&P BSE Sensex that rose by 32%, a modest run compared with its mid-cap and small0cap peers.

So should you switch to mid-caps and small-caps now? Before you decide to bet on mid-caps and small-caps, be sure about the risks involved. Here’re 5 factors you need to watch out before investing in these stocks or mutual funds.

(1) Historical data suggest that when equity markets surge, mid and small cap indices outperform their underlying large cap benchmarks.

(2) The opposite is also true, i.e. in times of market meltdown, mid and small caps fall more sharply than their large cap indices.

(3) Markets are surrounded by lot of optimism. The key factors driving the markets are the positivity built around the Modi-led government and a strong hope for reforms. However, what remains to be seen now is how effectively the policy decisions are taken which will keep the momentum and investor sentiment upbeat.

(4) If you’re planning to invest in a mid-cap or a small0-cap fund, apart from returns you should also look at the composition of the schemes. Be aware of how the scheme is being managed, its portfolio composition and whether or not it is in sync with your investment idea.

(5) The strategy should be to be well spread across market capitalizations while slowly increasing the exposure towards mid and small caps.