The Mint asked us this question. They were writing a piece on the way forward for such funds. They wanted to know our thoughts on this because of a few small-cap funds re-opening their window for subscriptions. This was after a few fund houses took a call to selectively to close the subscription to their schemes as they felt the need to protect existing investors in wake of rising valuations at that time.
Our take: “Mid- and small-caps have outperformed all other categories in the long term. The recent correction in small-caps have made mispricing in many quality stocks and this should give fund managers the opportunity to craft a long-term portfolio. Though the category is loaded with risk in the short term, many small-cap investors have seen huge returns in the long term. Investors having long-term goals should make use of this window and invest systematically,” said Ravi Kumar T.V., director, Gaining Ground Investment Services Pvt. Ltd.
Recent market movements have given rise to newer opportunities. A few schemes like L&T emerging Business fund, DSP Small cap fund, and a few others have opened the door for new investments. These schemes have a very good track record. Is it worthwhile to look at these categories now?
Did you know? Mid-cap and small-cap stocks have outperformed all other categories in the long term.
More insights are gained after looking at the performance, profit and loss for the last several years of small and mid-companies, quality and consistency of the management, and the current prices after the correction post January 2018. All these things make the category an attractive investment. Though the category is risky to invest in for the short term, many small-cap investors have seen and will see good returns in the long term.
Why now? The recent corrections have dragged many quality stocks to unrealistically low levels. This presents fund managers with a great opportunity to craft a sound and an attractive long term portfolio. Investors with long-term goals should make use of this window and invest systematically.
Come again. India is a stock pickers market. We have some very experienced and astute fund managers. Their decision to open the gates for fresh investment is driven by the real potential for growth that presents itself at these valuations, which are reasonable and worth considering after a massive correction in the small-cap and mid-cap space.
What should you do? Be selective. Although the mid- and small-cap space has corrected, don’t expect too much, too soon. If equity funds ask that you keep a minimum of a 5-year time horizon to expect good returns, small-cap and mid-cap funds require more patience. Also, just because one or few of such funds re-open for subscription, doesn’t mean you have to jump in. Look at the scheme’s track record across market cycles and then decide on one, depending on how much allocation to such funds is necessary in your allocation.
Do note: Investors should keep in mind the recent scheme categorization before choosing their midcap or small cap fund for their portfolio.