Will it be prudent to invest in mid and small cap funds?

Jun 21, 2019

Will it be prudent to invest in mid and small cap funds which are at all time low returns in past one year but are otherwise 4 or 5 star rated funds and have given good returns in past. For eg Aditya Birla mid/small cap and Invesco me d cap or HDFC small cap fund.

1 Answer
Jun 22, 2019

Related imageMustajib, whenever you decide to invest first important step to follow is to identify your goals. Goal based investment is very important. Once your goals are set up next step it to list down each and every goal's time horizon. According to the time horizon you should segregate your goals into small term goals and long term goals.

Once you know your goals next step is to decide your asset allocation according to your risk profile and time left for the goal. Once it is done you need to choose your financial instruments where you want to invest.

Generally short term goals can be divided into 1/3 yrs and 3 to 5 yrs. For 1 to 3 yrs goals your asset allocation should be 100% debt which will have FDs/RDs and liquid funds. For goals up to 5 yrs you can add short term Debt funds. NEVER EVER think of investing in any Equity Fund for short term goals even if you find 1 year equity return very lucrative. For goals less than 1 year stick to saving bank account or 12 months RD only.

If time horizon of your goals are more than 7 yrs you can say that it is a mid long term goal. You can add Equity component for 7 to 10 yrs goal. Ideal mixture will be 50:50 for debt and equity. If you are higher risk taker it can be 40:60. But here your equity should be in the form of Largecap and Multicap mutual funds only. For conservative investors you can add Index fund or ETFs.

Goals which are more than 10 yrs are really the long term goals. Those goals are kids education/ marriage and retirement etc. If you are young and goals have 20/25 years please take higher equity exposure to create a long term wealth. Young investor should not be so conservatives than they fail to generate long term wealth which they need to support them life long. At this time you can take 80% exposure in equity and can add Mid and Small cap mutual funds for these long term goals.

Why I am giving you all the details because it is very important that you should plan your investment strategy well. Just blindly investing in Mid and Small cap mutual funds looking at their returns 2 years back is not good strategy. These funds are highly volatile in nature. Their returns keep on fluctuating. If you don't have stomach to digest its volatility keep away from these funds. These funds are excellent instrument of wealth creation if used wisely. I advise you to build your equity portfolio based on Core and satellite approach. In this pattern, more proportion of money is invested in Large and Multi cap fund. The large-cap can generate 10 to 12% returns for SIP investments. These funds provide stability and minimize the downside risk of the market. The smaller portion is invested in good quality in Mid and Small Cap as satellite portfolio which has the potential to generate 15 to 18% returns. This can add a kick in overall portfolio returns. So map these good quality Mid and Small cap funds to long term goals mostly for retirement as per your risk profile. And have really a long term view for these funds.

When you know your investment strategy you will not afraid of any small fluctuation happened in market.

If you have invested in above mentioned funds recently or planning to invest for long term kindly do not worry about this fall. This fall can be a good opportunity to enter those funds. Keep a watch on its performance. Any mutual fund’s performance can't be judged in 6to 12 months. Any investment in mutual fund also needs 1.5 yrs to 2 yrs to evaluate its performance.

So I advise you to check above discussed pointers before taking any decision. It is always better to take help of the expert SEBI RIA for your finances.

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