Are you Investing in Mutual Funds? Well, there are three types of mutual funds in the market, the Large Cap Funds, the mid-cap and the small cap funds. So, if you are in a dilemma as to in which funds should you should put in your money, how much risk you should take and the decline you should expect, here’s what experts say about investing in mutual funds.
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“Small and mid-cap is able to outperform your large cap indexes by at least 2-3 per cent. If we look at any small cap fund over a decent 10-15 year period, then we will see that are able to significantly out-perform the large cap index,” said Arun Kumar, Head of Research at Fundsindia.com.
“Small cap funds come with a lot of temporary declines and the extent of it is very very high compared to large caps. In a large cap, every year, the temporary volatility which is generally seen, is roughly around 10 to 20 per cent whereas in small caps it’s almost 20 to 30 per cent. In the last 18 years, it had a fall of almost more than 20 per cent. Which means, in roughly 1-2 years you must be mentally ok with the temporary fall of more than 20 per cent. Whereas for large caps, it was almost five out of 18 years and on-average intra-year fall has been 25 per cent for small caps whereas it is 18 per cent for large caps,” he added.
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Why is it difficult to hold on to small cap funds?
“Most people ends up selling out of small cap funds once it falls and then when it goes up they are tempted to book profits. Thus it becomes very difficult for investors to hold on to small cap funds,” said.
Kumar also talked about the need to diversify the total investment amount into different funds and not just putting the amount in entirely one fund.
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“Investors need to cap their overall allocation to small cap at less than 20 per cent, so that the remaining portion can go to flexi-caps, large caps, so that the volatility is contained at a portfolio level. The other thing investors can do is to diversify their funds across two-three good small-cap fund so that they are not dependent on a single pocket and diversify it across different segments,” he said.
It is a very very good category for SIPs because you stagger it over a longer period of time, he added.
Talking about balancing of funds, he said that investors need to do rebalancing of funds once in a year to minimise risks.
“If you have 20 per cent of your equity portfolio into small caps and it has crossed 5 per cent (+/-) max, then you knock off the additional amount, move it into large caps or flexi-caps and bring it back to 20 per cent,” said Kumar.
