Don’t be in a hurry to dump your midcap and smallcap schemes

Don’t be in a hurry to dump your midcap and smallcap schemes

Investors in midcap and smallcap schemes are watching the carnage in mid- and smallcap stocks with a bit of concern. The S&P BSE mid- and small-cap indices have been in the negative territory since January. The S&P BSE SmallCap Index is down to -3.98 percent in three months and the S&P BSE MidCap Index is returning -4.56 percent in the same time frame.

The Economic Times reported yesterday that more than 500 stocks have corrected between 30 percent and 70 percent since their highs in January. Should investors in midcap and smallcap mutual fund schemes worry?

“The valuations are elevated in the small- and mid-cap spaces. To some extent the re-categorization of mutual fund schemes is also impacting the stocks, but that’s not a big churn. Similarly, the crude oil prices and rupee depreciation also are making an impact but that is not just on small and midcaps but the entire market,” says Gautam Sinha Roy, VP, fund manager, Motilal Oswal AMC. Jimmy Patel, CEO, Quantum AMC, says there are several reasons behind the current carnage in the mid- and small-cap space. “We have been asking investors to stay away from the small- and mid-cap spaces since the last one year,” says Jimmy Patel, CEO, Quantum AMC.

Indeed, fund managers and mutual fund advisors have been asking investors to cautiously bet on smallcap and mid-cap categories for a while now. The smallcap category returned -2.27 percent in one week, -1.37 percent in one month and -2.29 percent in three months. Similarly, the midcap category has offered -1.90 percent returns in one week, -0.94 percent on one month and -0.60 percent in three months.

According to fund managers, the midcap and smallcap stocks are unlikely to bounce back anytime soon. “There are no positive changes in the small- and mid-cap space. The valuations are still very expensive. In this scenario, I am not expecting midcaps and small-caps to do great soon,” says Jimmy Patel.

Gautam Sinha Roy also believes that small and midcap stocks will not rise soon but advises investors to not to take isolated decisions. “We can see volatility due to elections in the later part of the year. Small and mid-cap valuations are really elevated and we are not expecting them to give superior returns in the near future. But investors shouldn’t quit just because of their underperformance. Yes, if you are overweight on small caps and midcaps, you should consider cutting some exposure,” advises Roy.

Investors, especially new ones who jumped into the smallcap bandwagon in the last year, should pay attention to Roy’s words. A kneejerk reaction can hurt them very badly at this juncture. Many mutual fund advisors say some newcomers invested in smallcap and midcap funds last year against their risk appetite for superior returns.

“Some investors thought that the advisors are giving them wrong info when they asked them to not to invest in smallcap schemes. It is always a bad idea to invest in a scheme looking at just its past one-year returns,” says Puneet Oberoi, Founder, Excellent Investment Advisors.

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