The Mutual Fund Show: Invest In Small- And Mid-Cap Schemes For Long Term, Say Financial Advisers

Actively managed small and mid-cap funds have underperformed the indices this year, but the long-term picture is different, according to experts.

The average return from small-cap index funds is 42% on a year-to-date basis compared to a 42.7% rise in the Nifty Smallcap 250. The average return from the midcap index funds has underperformed the Nifty Midcap 150 by 0.7%, according to the data provided by Nikhil Kothari, director of Etica Wealth Pvt.

Kothari explained that this is because the funds would like to have some amount of cash and stocks that are slightly less volatile so that they could beat redemption pressure.

"Lots of fund managers are not comfortable in the current context of small-cap and mid-cap valuations, so they are biased towards large caps," Kothari said. "In the longer picture, the numbers will not be as dramatic as what you see in the last year."

However, if returns are average, it is not necessary that all the funds in the category are underperforming. It is difficult to deploy money in the small-cap space, which may have caused some lag in performance, according to Mrin Agarwal, founder of Finsafe India Pvt.

Agarwal also pointed out that there are many small-cap stocks that might not have qualified for the due diligence of small-cap funds.

Kothari underscored that there are several factors that have worked for the funds, like the Nippon India Nifty Smallcap 250. These include a large corpus, a cash component that is not that detained because the size of the fund is huge, consistent fund managers, and a diversified approach in terms of stocks.

He said passive funds worked because they already had predefined criteria based on which funds were selected and there was no lag between deployment and inflow.

Agarwal and Kothari recommend investors stay invested for the long term in these funds.

Agarwal recommends setting the expectations right, stressing the need to have a 10–15-year timeframe. She recommends having a portfolio consisting of passively managed large-cap funds and actively managed mid- and small-cap funds.

She said the portfolio should be rebalanced once a year, but an investor should know how much rebalancing is to be done.

Kothari does not recommend mid- and small-cap funds for someone who gets jittery with volatility. For midcaps, he recommends the Motilal Oswal Nifty Midcap 150 Index Fund Direct Growth. In small cap, he recommends the Nippon India Nifty Smallcap 250 Index, saying that it has limited stocks.