Mid- and small-cap funds fell by over 10% in three months. What should mutual fund investors do?

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Investors are concerned about their mid cap and small cap investments. Both these categories lost heavily in the recent mayhem. The mid and small cap mutual fund categories lost over 10% in the last three months. Both categories were down 7% in the last one week. Mutual fund managers say investors should be ready to face some more pain in the near term.

Here’s a list of the mid cap schemes that fell the most in the recent market fall:

Scheme name 1-week returns 1-month returns 3- months returns
Taurus Discovery Fund -9.76 -13.83 -9.82
UTI Midcap Fund -8.46 -12.67 -11.97
IDBI Midcap Fund -8.32 -13.28 -12.80
Quant Mid Cap Fund -8.28 -14.24 -6.24
Kotak Midcap 50 ETF -8.22 -13.59 -10.65

Source: Value Research
Small cap funds:

Scheme name 1-week returns 1-month returns 3- months returns
ABSL Nifty Smallcap 50 Index -11.46 -18.83 -19.38
Quant Small Cap -10.46 -18.44 -16.05
PGIM Ind Small Cap -10.13 -14.31 -11.75
Motilal Oswal Nifty Smallcap 250 -10.10 -16.50 -14.56

Source: Value Research

Mutual fund managers say that irrespective of the troubles the long term view of these two segments continues to be positive. “We continue to be constructive on mid-cap funds for investors with an investment horizon of 5-10 years. We have been and continue to be cautious on small-cap funds, particularly with a near-term view. Hence, we advise existing investors to ride the volatility in the near-term to reap the benefits over the medium term,” says Trideep Bhattacharya, Chief Investment Officer- Equities, Edelweiss Asset Management.

Experts also want investors to go back and take a look at their portfolios. If investors cannot stomach this kind of volatility, they should either add more balance to their portfolio or stay away from mid and small cap funds.

“During times of market volatility, investors should prefer funds which invest in stocks with reasonable trading liquidity. Illiquid stocks are likely to see higher volatility during times of volatile markets. Underlying stocks of small and mid cap funds generally tend to be less liquid. Further larger companies tend to fend off macro challenges much better than smaller ones due to scales and balance sheet strength and have potential to provide superior risk adjusted return. Investors should also have such schemes in their portfolio,” says Sorbh Gupta, Equity Fund Manager, Quantum AMC.

Another important advice that fund managers offer to equity investors is to stagger their investments and keep investing. They say that stopping SIP is not a good idea when the market goes down. “”We are approaching the market with a near-term outlook being volatile and medium-term outlook being constructive. In this context, we are advising investors to invest in tranches in near-term rather than lump-sum investments,” says Trideep Bhattacharya.

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