Be Cautious While Investing in Micro/Small/Mid Cap Mutual Funds

RAHUL GEHLOT - Nov 01, 2018

Update on 14th Oct 2022

Among various categories from equity mutual funds, mid-cap funds has its own charm. This category is able to deliver very high returns when markets are doing well. Mid-cap and small-cap funds have averaged 19% and 40% CAGR respectively over the past three years, compared to 15% on an average by large-cap funds. The stellar performance has attracted more investors to this basket, leading to a surge in inflows and a burgeoning asset size for many funds. But on other side they also get the most of the beating when market is otherwise in a bad phase. The variation between fall and rise has been huge in small/mid-cap equity funds, which makes an investor think whether to invest in mid-cap equity funds or stay away from it or invest partially.

Here is a brief analysis on certain parameters about why one should be cautious about investments in Micro/Small/Mid-Cap mutual funds.

Liquidity. The data from CRISIL (Credit Rating Information Services of India Limited, a global analytical company providing ratings, research, and risk and policy advisory services) suggests that some mid- and small-cap funds have seen their liquidity profile deteriorate over the past year. In simple terms, the rating/ score measures the number of days it would take to liquidate the entire portfolio.

But why should you as an investor be bothered about a fund’s liquidity position? Liquidity refers to how easily the redemption/withdrawal can be realized into your account in the market without significant loss of value.

Risk. Small/Mid-Cap segment is highly volatile. If they can deliver out performance from other categories and their benchmarks by huge margins, then they also get the most beating when the markets are down. Where a large cap equity funds will restrict its fall, the mid-cap fund has all potential to go down. During the market fall of 2015 some mid-cap stocks crashed by as high as 80% while large cap remains on course. So if you have high exposure to this sector then you can expect a higher downfall from your peers who might be more comfortable on large cap.

Fund Manager. A fund manager is an essential ingredient to the success of a fund. Funds where fund manager stick longer do well in long term than funds which see a higher movement. The overall experience, past performance and expertise of a Fund Manager is of paramount importance while selecting a mutual fund. He is the one who is managing the complete portfolio of the fund scheme, so keep this parameter also in mind while selecting a Fund scheme for investments.

The other important factors like AUM (Assets Under Management), sector allocation, past performance of fund, peer comparison, asset allocation, holding stock category etc., also need to be taken into consideration before investing in mutual funds, which require deliberate and thorough analysis of the scheme by experienced experts of the financial field.

What You Should Do?

Never get lured by the high returns of mutual fund and start investing in such micro/small/mid-cap funds.

Large-cap/ Multi Cap funds with well diversified portfolios and consistent performance even during high volatile markets are largely recommended.

Every investor can’t be well-informed or aware of the nitty-gritty of financial world, so an investor should always take advice from a well qualified financial advisor-preferably a SEBI registered IFA (Independent Financial Advisor) with AMFI Certification and if you don’t have one then don’t bother, we at Investocafe provide a well-researched set of mutual funds after due diligence on your risk profile. The set of funds at Investocafe have been consistent performers which have given decent inflation beating returns over the past years since their inception.


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Happy Investing

Team Investocafe

Written By :

Rahul Gehlot, (Chief Operating Officer at Investocafe and registered SEBI investment advisor)

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