Over the past 4 years, small cap and mid cap funds have performed exceptionally. However, post Union Budget 2018, they haven’t been doing as well. According to indices available on NSE, Nifty is down by 4%, mid cap index has dropped by 7%, and the small cap index even more drastically by 16%. This has obviously caused some concern among investors – should they stay invested or exit these funds?
Mutual funds investment management involves overseeing a diverse portfolio of assets to maximize returns and minimize risks on behalf of the fund’s investors. Everyone asking themselves whether they should invest in small caps now also needs to think – when is the right time to sell them? Here are some key considerations.
Keep your small cap funds in perspective
It is important to keep your small cap funds in perspective when deciding upon your equity fund allocation. When allocating monies across large cap, mid cap and small cap funds, it is generally recommended that the ratio be 70:20:10 in favour of large caps. This will diversify your portfolio while taking advantage of the potential for greater returns from mid caps and small caps.
If the allocation of mid-caps and small caps deviates by more than five percent from their original levels, then reallocation should take place in order to restore the ratio accordingly. With this rule-based approach, you can ensure that your mid-cap and small-cap investments remain secure. Perspective is crucial.
Focus on credible mid cap and small cap stories
Mid cap and small cap funds are quite heterogeneous and can be difficult to benchmark against an index. To get a better understanding, it is recommended to examine the portfolio composition. Assess whether the stocks within it are speculative or stable and focus on those that display profitability and have strong business models.
There is a Wealth Management Services in Rajkot of information surrounding companies on the internet which can help to shed light on their portfolios. When investing in these types of funds, the quality of what they hold is incredibly important.
De-risk your mutual fund portfolio with multi-cap funds
Weed out the high debt and high equity names
When assessing the portfolio of a mid cap or small cap fund, one should pay attention to whether any of its major holdings have a high degree of financial or dilutive risk. Such companies typically focus on one line of business or rely heavily on a few customers, so these risks can be particularly damaging.
Therefore, it is advisable to avoid funds that have large investments in stocks with substantial debt loads or equity dilution. Profits from low debt and low equity are beneficial for all types of stocks, but even more so when looking at the smaller caps.
Finally, past returns and consistency are rarely wrong
Mutual funds investment management involves professionally overseeing and optimizing a diversified portfolio of assets on behalf of investors to achieve their financial goals. Choosing between two mid cap funds or small cap funds can be complicated. Past returns, outperformance and consistency of returns should all be taken into account. It’s true that past performance doesn’t guarantee future success, but it can still be a reliable indicator.
For example, if a fund has underperformed the index for 8 quarters on a rolling 3 year basis, there’s little likelihood that will change soon. In addition to outperformance, consider consistency when assessing funds. A fund with 15% annualized returns is more preferable than one that sees large fluctuations in performance yet offers the same return over 5 years. Ultimately, consistency is key in deciding between mid and small cap investments.
Also Read: Role of Wealth Management Services in Long-Term Financial Planning
