Is it a good time to invest in mid and small-cap funds?

The market is all-time high again. There seems to be a sustainable bull run till any negative global or local news arrives. In this bull run also some big giants of the Sensex index like Reliance, HDFC, HDFC bank are in sluggish mode. In contrast, some mid stocks of the index are performing better. So mid and small caps are again favorites in investors’ list. But one should be careful while selecting the type of mutual funds for goal-based investment purposes.

Retail investors are the ones who are mostly at loss in the equity asset class. Why does this happen with them?

  • Wrong time of entry
  • Wrong time of exit

These are the basic reasons for the losses. Retail investors most of the time just got lured by the returns generated by different mutual funds. They all just visit some famous financial sites and select top-rated mutual funds for Investment. They hardly check the mutual fund category and what is the investment philosophy of that mutual fund.

Currently, many investors are finding the pharma sector very lucrative. As well as mid and small-cap funds. Suddenly upward rally can be seen in these fund categories.

But before blindly investing in such mutual funds you should first understand

What are mid-cap and small-cap mutual funds,

Where these funds have their Investment,

How much risk is associated with such funds, and

What is the expected Investment time for earning a decent return from such kind of Investing.

Mid and small-cap mutual funds invest in those companies which are having numbering based on market capitalization after 100 to 250 on Nifty (midcap) and small caps are after 250. These companies are having turnover in mid and small manner but they have the potential to become big in the coming future.

Mid and small-cap funds’ fund manager finds such gems and invest based on their future potential and possibilities of growth. But sometimes because of economic conditions, management, and external factors, not every small or mid-sized company can grow as a blue-chip. In such a case fund managers’ bets can turn wrong and recovery can be very difficult in such bets.

That’s why this category of mutual funds is very risky and volatile. Suddenly you can see an upward trend and suddenly you see a sharp recovery. You may experience long years of sluggishness in mid and small-cap funds after a sharp rally.

So before Investing in such types of mutual funds

  • Kindly assess your risk-taking ability.
  • Are you comfortable with the volatility of these types of mutual funds?
  • How much is your holding capacity of such funds if you have negative returns till the next rally?
  • Can you wait an unlimited time to get extraordinary returns?
  • Do you have a stomach to see a similar bloodbath that happened in the month of March April in this category if happens in the future?

If your answers are pretty much positive then you can think of Investing some part in such a segment. But you have to map such funds only to your long-term goals which are 10+ years away.

Do not just follow herd mentality in Investing or else you may be disappointed in the future.

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