Goodwill  Investor Education Initiative :  GoodWill  Eagle’s Eyes!

“ Booking of Profits in Mid-cap and Small Caps- Is it the time?”

The midcap mutual fund category has offered an average return of 70 percent over one year. Similarly, the NIFTY smallcap 100, which is the benchmark for smallcap funds, has delivered 114 percent return over one year, according to Archit Gupta, founder, and CEO of ClearTax.

It’s important to note here that midcap and smallcap space usually have short boom and bust cycles. It helps investors, as Gupta said if they time the market cycle correctly to maximize returns from these funds.

While mentioning this, Bansal said past performance should, however, not be a direct indicator for future performance. Therefore, investors should choose mutual funds based on a number of parameters.

“They should decide basis criteria such as active return over the fund’s style, the performance of the fund and the risk it takes to deliver that performance on market down days, consistency of historical performance to its benchmark and qualitative parameters of the fund house and the fund manager,” he further said.

Adding to this, Gupta of ClearTax said while checking the performance of midcap funds and smallcap funds across bull and bear markets, it gives an idea of the downside protection offered by these funds during past bear markets, which is equally vital as returns in a bull market.

“Midcap funds and smallcap funds are more impacted by macroeconomic factors as compared to large-cap funds. Moreover, one gets the best performance from these funds only if they can pick smallcap funds and midcap funds when the bear market is bottoming out,” he mentioned.

So, he said it would help if investors pay close attention to the management of this midcap and smallcap companies and the company financials and opt for midcap funds and smallcap funds with a lower expense ratio to increase the take home-return.

On talking about profit booking from a category, Bansal said it totally depends on the overexposure of the category in the overall portfolio.

According to him, investors should not form decisions just by looking at midcap or smallcap funds in the portfolio. The overall allocation to mid and smallcaps depends upon concentration in the multicap, flexicap, large, mid and smallcap portfolios.

One’s overall exposure, Bansal suggested, can be 15-30 percent in midcap and 5-20 percent in smallcap. However, it is important to note here that every investor’s risk profile is different.

“Unless the current allocation crosses more than 5 percent above the designated allocation due to the recent market rally, there is no need to rebalance. Investors should also ensure that allocation is in highly ranked funds and switching to better-ranked funds is always preferable. They can trust fund managers to handle the matter of investing in deserving stocks, even if the market looks expensive,” he stated.

Finally, overall asset allocation should be reviewed on a quarterly basis. It is best for individuals to work with a wealth manager or financial adviser who can guide on the prospects of various funds in different categories.

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