Historical data suggest that when equity markets surge, mid and small cap indices outperform their underlying large cap benchmarks. The opposite is also true, i.e. in times of market meltdown, mid and small caps fall more sharply than their large cap indices.
Currently, it is difficult to ascertain whether or not this is beginning of a bull run, but considering the recent trend it appears that the markets are surrounded by lots of optimism. The key factors driving the markets are the positivity built around formation of a new government. What remains to be seen now is how effectively the policy decisions are taken which will keep the momentum and investor sentiment upbeat.
Further, inflation which seemed to have been coming in the comfort zone has gone up and is seen below the market expectation. Now, whether the monsoons will be good to bring respite to the rising food inflation remains to be seen.
The FIIs have been investing in the markets leading to currency inflow. This coupled with control on the imports has led to Indian currency appreciating and stabilizing at the new level of 60-61 after touching the levels of 68. The rupee has been appreciating well and seems to be stabilizing at 58-59 levels. How much further it can appreciate will have to be seen and is one of the key factors to watch out for.
The Way Is Up
There sure are signs for rally and it does make a case for small and mid cap funds to be explored as an investment option. Now, what is important is to see how the small and mid cap schemes have been investing.
Based on the above data, if there is a rally from here on, mid and small cap will lead the rally and as the trend has been so far mid and small caps have outperformed the large caps.
It appears that fund managers are little cautious in terms of their exposure towards mid and small cap. This might be a good approach in order to ensure that in case the markets do not rally or there is some change in the momentum their portfolios might be less susceptible than the ones with higher mid and small cap.
However, as an investor if you are investing in a mid-cap or small-cap fund, then you assume your investment is being made in such a pattern. Also, if the scheme has to justify and work according to the underlying objective of investing in small or mid-cap stocks, it should be doing just that. However, currently even most of the mid and small cap funds are being managed as a multi cap fund with highest weightage being given to the large cap stocks.
Of the 40-odd schemes categorized under small and mid-cap category, average holding in large cap is 52%, mid-cap 22% and in small-cap of around 20%. It is possible that the composition may have changed in the month of April owing to changing scenario which has to be seen.
What To Look For
As an investor when one is choosing a mid or small-cap oriented scheme, he/she is willing to take that extra risk in search for potentially higher returns, but if a fund has higher weighting towards large cap then the investment is not justified. Even a large cap fund might have some exposure towards small and mid cap so as to generate that extra return.
It again boils down to investor being aware of how the scheme is being managed, its portfolio composition and whether or not it is in sync with your investment idea. So, when one is choosing a mutual fund for investment, apart from returns one should also look at the composition of the schemes.
Going back to the main question, is this the right time to consider mid and small cap? Yes, in the current market scenario and how things are building globally the time looks apt for increasing exposure towards them, however with a word of caution and risk appetite. The idea should be to be well spread across market capitalizations while slowly increasing the exposure towards mid and small caps.
It is advisable to carefully select schemes in consultation with advisor so that they are as per your investment plan and then review it on a quarterly basis to ensure that your ideas and targets are on track. Generally, quarterly review is to identify non performers or under performers so that in the next review special attention is given to those so that the entire portfolio is working towards your targets.