Mid And Small-Cap Mutual Fund Investors Can Use These Strategies

The sharp sell-off in the mid and small-cap space, following a massive bull run, has now started to cause concern among mid and small-cap mutual fund investors. The allocation to these areas has been quite strong over the last many months, as seen by the inflows that these categories of mutual funds have received. Recently, there have been warnings from the market regulator Securities and Exchange Board of India about froth in this segment, plus the move by several fund houses to restrict inflows in small-cap funds. Considering this situation, there is a need for investors to be clear about the strategy that they will adopt going ahead. Here are some ways to handle this.

Investors who are putting money regularly into these funds through the Systematic Investment Plan route have a slightly easier decision to make with respect to their investment. If your investment is being done according to a specific asset allocation requirement and this is meant for the long term, then the SIP should continue. A fall in the market is not the time to stop an SIP because the real benefit of the entire process comes when the prices are low, so that there is an averaging out of the cost and more units are allocated for the same amount of investment as before. Those who have fixed their SIP amounts with proper planning can go about their investment process as before, once they have checked out the extent of their exposure.

The key part of the action that investors need to take is with respect to the allocation and weightages in their portfolio. Normally, this kind of exercise should be done once a year and for those who have not done so yet, the current bit of disruption can be used as an excuse to complete it. The investor needs to check if their asset allocation has changed from what they wanted it to be. This could be a heavier tilt towards equities because of the run-up in prices over the last year. If this is the case, then it would call for rebalancing between asset classes and moving some amounts to debt.

The second part that needs to be completed is to check for allocation within equity between various market caps. If there is a higher allocation to small-caps through these mutual funds, then this would require redeeming the required amount from small-cap funds and shifting them to large-caps through appropriate funds.

The way in which many investors behave is to invest lumpsums into mutual funds at specific intervals when they feel that it is the right time to do so. With the situation in the mid and small-cap space extremely volatile and valuation concerns being raised from a lot of quarters, including fund managers and the market regulator, there is need for extra caution. Making any lumpsum investments into such funds at this juncture would be a very risky move and one should stay away from it. This would be more of an attempt at trying to time the market, which would not be a wise strategy.

As a mutual fund investor who has taken exposure to mid and small-cap funds, your time horizon is expected to be for at least five years and more. This means that a lot of the ups and downs in the interim period will have no impact, as far as the final result is concerned. It requires that the investor should not look at the Net Asset Value everyday, along with the value of their investment. Such a move will only fuel the desire to take some action immediately and this is likely to end up harming the long term goals of the investor.

Arnav Pandya is founder Moneyeduschool

The views expressed here are those of the author, and do not necessarily represent the views of NDTV Profit or its editorial team.