Small and mid-cap funds have been the preferred choice of many when it comes to mutual fund investing. By the end of CY2017, returns in excess of 30 percent ensure top of the returns-chart placement for these funds which in turn ensured sustained inflows from investors, especially first timers. No wonder some of them have loaded up their portfolios with small and mid-cap funds to the hilt.
Here are three parameters that indicate that you have gone overboard with the small and mid-cap funds and some expert advice on how to handle the situation.
You have invested more than 30 percent of your money in small and mid-cap funds
“Sometimes investors get influenced by the short-term performance and load up a particular type of scheme in their portfolios and sometimes market movements change the portfolio mix,” says Nishant Agarwal, Managing Partner & Head – Family Office, ASK Wealth Advisors. As mid cap funds offered much higher returns than the large cap funds the weight of mid and small cap funds rose against the weight of large cap funds. In CY2017 large cap funds as a category delivered 30% returns, whereas mid cap funds on an average delivered 43% returns.
The relative outperformance has attracted many novice investors to the mid and small cap funds. But it is followed by increased anxiety in investors’ minds. Agrawal recommends limiting the exposure to mid and small-cap funds to 30 percent of the total corpus.
One should do his risk profiling before investing in equity mutual funds. “An aggressive investor should allocate 70% of his money in equity and rest to debt. Out of his equity exposure maximum 20% can be invested in mid and small cap funds,” says Renu Pothen, head of research, fundsupermart.com.
So put it straight, if you have more than 30% of your money in mid and small cap oriented mutual funds and you are worried about your portfolio, it is time to review your portfolio.
You have invested short term money in small and mid-cap fund
By now, you must have realised that it is a dangerous idea to fund any short term goal with investments in volatile investment avenues such as equity funds. “If you are keen to invest in small and mid-cap funds you should ideally have a time frame of around 10 years,” says Tanwir Alam, founder and CEO of Fincart.com.
If you have saved money to pay for your child’s school fee due next year, do not dabble with that money in small and mid-cap funds, for that matter any equity fund. That money should be parked in a liquid fund or a bank fixed deposit.
You have lost sleep at night because of your investments in small & mid-cap funds
If the recent fall in the market has led to loss of peace of mind, then you may not be cut for it. Not that all successful investors do not get worried when the market falls, but they may not be losing their sleep at night. All the investments and financial planning is aimed at achieving financial freedom and peace of mind.
If you have lost your sleep due to the volatility in the small and mid-cap space, it is definitely time to act. The best expert to go to on this issue is Jesse Livermore, the legendary trader in USA. In the thinly disguised biography of Jesse Livermore – ‘Reminiscence Of A Stock Operator’ the best advice comes by, “Sell Down To The Sleeping Point.”
Small and mid-cap funds make a strong case for inclusion in aggressive portfolios, provided one lets them run for long term.
Investment & trading in securities market is always subjected to market risks, past performance is not a guarantee of future performance.
CapitalStars Investment Adviser: SEBI Registration Number: INA000001647
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