Small and mid caps revival on cards; should mutual fund investors join the party?

corpus mainMany stock market pundits believe that mid cap and small cap stocks are likely to bounce bank in the current rally in the market. The short term performance of small cap and mid cap mutual fund schemes underscore the trend: the small cap mutual fund category has returned 5.26 per cent and the mid cap category has offered 4.61 per cent returns in the last one week. Though the pundits attributed the impressive performance to improved sentiment in the market following the election mandate to NaMo government, they believe small cap and mid cap mutual funds may continue to gain in the coming days.

“We are expecting mid cap and small cap segments to do well, but that doesn’t mean they will outperform the market like 2017. The two segments have seen correction and we are expecting the valuation to become better. We can’t say that small and mid cap mutual funds will start giving great returns. However, as a segment, we can see revival in mid cap and small caps, but it will not happen overnight,” says Gopal Agrawal, senior fund manager and head of macro strategy, DSP Mutual Fund.

Fund managers believe that the easing interest rate scenario is ideal for the small and mid cap segments. However, the rate cuts earlier this year did not translate into a good show by both these segments, probably because lack of transmission of rates by banks. “Due to the liquidity issues, which have been more or less resolved by RBI’s OMOs, and a narrow market rally, the small and mid cap segments did not perform in the last couple of months. These segments will go up but we shouldn’t expect them to outperform the rest of the segments,” says Vinay Paharia, CIO, Union AMC.

Small and mid cap mutual funds have been beaten down in the last one year but there are signs of revival in the short term. However, fund managers believe that investors shouldn’t expect too much from these schemes. “In the last couple of years, we have seen the valuations of small and mid cap companies running much ahead of fundamentals. To some extent, the valuations have corrected but real outperformance in mutual fund schemes will take time,” says Vinay Paharia.

Mutual fund managers say that investors shouldn’t make the mistake of seeing the entire small and mid cap segment as one. They point out that only quality mid and small cap stocks would outperform in the current market. “Sure, there will be select quality companies which will do well, but for the entire segment we will have to wait for the government to fix liquidity, GST compliance issues and tighten macros for smooth revival in mid and small cap segments,” says Gopal Agrawal.

According to these fund managers it is always a good time to invest in small and mid cap schemes If you have the risk appetite and a long investment horizon. Investors can invest in small and mid caps at any point, they add.