Compared to large-cap funds, mid- and small-cap mutual funds are considered riskier, but with the potential to generate higher returns. Mid-cap mutual funds select mid-cap stocks for investments, which are ranked between 100 and 250 based on market capitalization. Small-cap mutual funds invest in small-cap stocks that are lower than the top 250 stocks by market cap. 4,444 Nifty Smallcap and Midcap indices reached an all-time high of 10,617 and 28,266 on August 2 and 3, 2021, respectively. This rally came after significantly underperforming between 2018 and 2019. During this time, the small and mid-cap segments faced various headwinds such as the NBFC crisis, slow growth, the recategorization of SEBI for small and mid-caps, etc. 4,444 experts believe that small and mid-cap funds in India have good growth prospects and have performed well in the long term compared to large-cap or flexicap funds.
“Historically, these funds have performed well over the long term compared to large-cap funds or flexicap funds. Given the 10-year time frame, the mid- and small-cap funds have over-returned 56%, ”Anurag Garg, founder and CEO of Nivesh.com, told FE Online.
Garg went on to say that while 2018-19 was the underperforming year for mid-cap funds and small-cap funds, those funds have averaged their returns over time.
“The 5-year CAGR for mid-cap funds is 15.5% and for small-cap funds 16.9%. While the CAGR was 62.8% and 76% respectively last year. This also shows that performance averages over a longer time horizon, ”he said.
Will small and mid-cap funds continue to develop in the long term?
According to Garg, the outlook for small and mid-cap companies in India is very good.
“When we look at the historical trend in emerging markets, small and mid caps benefit the most from economic growth. We have examples from China, Taiwan, and the Philippines. Currently, the per capita income of India is $ 2,000. Historically, the highest growth in any country has occurred when its per capita income increased from $ 2,000 to $ 10,000, as it helps significantly increase people’s discretionary spending. Small and mid-cap companies appear to benefit from such increased consumption. As the Indian economy grows over the next 510 years, small and mid-cap stocks will continue to benefit from providing superior returns to investors, ”Garg said.
he went on to say that many companies that were small caps 12 years ago are now large caps. For example, in 2007 Bajaj Finance had a market capitalization of Rs 1,859 crore. It now has a rating of over 4 lakh crore rupees. The same goes for Titan – it had a valuation of Rs. 7,398 crore in 2007 and is now valued at Rs. Rs 1.84 million lakh. Other examples are HCL, Asian Paints, Hero Moto Corps.
(Disclaimer: Investing in mutual funds is subject to market risks. Please consult your financial advisor before making any investment in mutual funds)