When it comes to equity mutual funds, small cap and mid cap mutual funds are termed riskier than their large cap counterparts. However, these small cap and mid cap mutual funds can deliver substantial gains especially when the economy is on the recovery mode. These are the companies that move fast and take quicker advantage of the improved economic conditions. The stock rises faster with even a little bit of influx in investments. No wonder in 2015, when the Nifty 50 and Sensex took a beating, BSE Small Cap and BSE Mid Cap rose by 5.4 and 6.7 percent respectively.
Global uncertainties prove to be a blessing in disguise for small and mid-cap companies. This is because large companies or large caps depend on global markets for a major share of their earnings. So when foreign investors exit emerging markets due to panic over rate increase in the US, there is pressure on large caps. Also in 2015, China found its currency devalued, resulting in rise in production costs and low consumption. Indian small and mid cap companies witnessed an increase in revenue because the ones that invested in textiles, chemicals and capital goods bolstered their exports.
In the past five years, small cap and mid cap mutual funds have delivered an average of 19 percent and 17 percent. So, if you had invested Rs. 1 lakh five years ago in both these funds, it would have earned you Rs. 2.4 lakh and Rs.2.2 lakh respectively. As we mentioned, this is just an average, the best ones have given 20 percent returns in the past five years, there are three year returns that have pushed 30 percent returns, too. Compare this to the Sensex that gave just 7 percent during the 5-year period!
Top performing small cap and mid cap mutual funds reflect the ability of companies to deliver superior growth in difficult economic conditions. One of the best performing mid cap mutual funds in the past five years is Mirae Asset Emerging Bluechip Fund. It has delivered 24.54 percent return over a 5-year period. It avoids companies that have weak cash flow like public sector banks, construction projects and companies that generate less than Rs.100 crore cash per annum. Small cap mutual funds have even outperformed their mid cap peers. DSP Micro Cap Fund has delivered 40 percent in 3 years, followed by Franklin India Smaller Companies Fund that has given 35 percent returns.
Should you invest in mid cap and small cap mutual funds?
Depressed prices of commodities, continuing slowdown in China and falling interest rates are likely to contribute to the growth of small and mid-cap mutual funds at least for the next two or three years. Efforts by the government to push investments can lead to faster growth for small and medium-sized companies. Sectors like capital goods, textiles, consumer goods and chemicals are perceived to be good sectors by most fund managers.
A long-term investor with a 5-year horizon can opt for small and mid cap mutual funds. If you have a high risk appetite, you can allocate 25 to 30 percent of your investment in these mutual funds; if want to take moderate risk, you can invest 15 to 20 percent in them. While choosing a fund, check how it has performed along the years and in different market cycles.