Home > Money > Question
Need Expert Advice?Our Gurus Can Help

Which Small-Cap and Mid-Cap Funds Are Best for My Investment Goals?

Ramalingam

Ramalingam Kalirajan  |6995 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Sep 17, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Rajkumar Question by Rajkumar on Sep 16, 2024Hindi
Money

Sir, Suggest me best Small Cap and Midcap Funds to invest

Ans: Small-cap and mid-cap funds are excellent choices for long-term wealth creation. They are ideal for investors with a high-risk appetite and a longer time horizon, typically over 7 to 10 years. These funds have the potential to deliver high returns but come with higher volatility compared to large-cap funds.

To ensure successful investing, it’s crucial to understand the characteristics of these funds before deciding where to invest. Let's assess the factors to consider.

Small Cap Funds: High Potential, High Risk
Small-cap funds invest in companies with smaller market capitalisations, usually ranked beyond the top 250 companies listed on the stock exchanges. These companies often have great growth potential, but they also come with a higher level of risk.

High Growth Potential: Small companies can grow quickly and deliver substantial returns, especially in emerging sectors. If these companies perform well, they can significantly outperform the market.

Volatility: These funds are highly volatile because small companies are more susceptible to market fluctuations, economic changes, and business risks.

Risk Management: Small-cap funds are suitable for investors who can tolerate short-term market volatility and focus on long-term growth. Staying invested for at least 7-10 years is essential to mitigate short-term risks.

Mid Cap Funds: Balanced Growth and Risk
Mid-cap funds invest in companies that rank between 101st to 250th in terms of market capitalization. These companies are relatively more stable than small-cap ones but offer better growth opportunities than large-cap firms.

Good Growth Potential: Mid-cap companies are often established, growing businesses that can scale up over time, making them a sweet spot between risk and reward.

Moderate Volatility: While they are more volatile than large-cap funds, mid-cap funds are less risky compared to small-cap funds. This makes them ideal for investors looking for higher returns with moderate risk.

Diversification Opportunity: Mid-cap funds provide an opportunity to diversify your portfolio by investing in companies that are poised for growth but have already proven their market presence.

Why Avoid Index Funds for Small and Mid Cap Investing
While index funds have gained popularity, they are not the best choice when it comes to small and mid-cap investments. Here’s why:

No Flexibility: Index funds merely track a specific index. If the index underperforms, the fund will also underperform. There’s no scope for fund managers to adapt to market conditions.

Missed Opportunities: Small and mid-cap companies are often in emerging sectors where individual stock selection can be more important. Actively managed funds can identify these opportunities better than passive index funds.

Active Management Benefits: A certified financial planner managing an actively managed small or mid-cap fund can adjust the portfolio in response to market movements and the performance of individual companies, which adds value to your investments.

Diversifying Your SIPs in Small and Mid Cap Funds
When it comes to SIPs (Systematic Investment Plans), it's crucial not to over-diversify, but at the same time, focus on proper diversification. Here's how you can approach investing in small and mid-cap funds.

Allocate Wisely: You could allocate 30% of your total SIPs to small-cap funds and 30% to mid-cap funds. This would give you a good mix of high growth potential and moderate risk.

Limit the Number of SIPs: Ideally, 2 SIPs in small-cap funds and 2 SIPs in mid-cap funds should suffice. Too many SIPs can make managing your portfolio more complicated and lead to overlapping investments.

Focus on Quality: Instead of focusing on the number of SIPs, focus on investing in funds managed by experienced professionals who have a strong track record of performance.

The Role of Active Fund Management in Small and Mid Cap Funds
As mentioned earlier, actively managed funds outperform passive index funds in the small and mid-cap category. Here’s why active management matters:

Fund Manager Expertise: A fund manager with deep knowledge of the market can handpick stocks that have high growth potential but are undervalued by the market.

Dynamic Asset Allocation: An actively managed fund allows the manager to increase or reduce exposure to certain sectors or companies based on market trends.

Risk Management: Fund managers can manage risk by diversifying into safer sectors or moving assets into cash or debt instruments during volatile times.

Therefore, it's advisable to invest through actively managed small and mid-cap funds under the guidance of a certified financial planner.

The Pitfalls of Direct Funds in Small and Mid Cap Investments
While direct mutual funds might seem cheaper due to lower expense ratios, they are not always the best option, especially in small and mid-cap categories. Here’s why:

No Professional Guidance: When you invest in direct funds, you don't get the support of a certified financial planner. Investing in small and mid-cap funds requires experience and market understanding, which an individual investor may lack.

No Ongoing Portfolio Management: A certified financial planner can provide ongoing advice on adjusting your portfolio based on market conditions. Direct funds leave you on your own to make these decisions.

Risk of Mismanagement: Small and mid-cap funds require a proactive approach to management. Direct investors may not have the time or knowledge to monitor the performance and adjust accordingly.

Thus, regular funds that offer the benefit of professional management through a certified financial planner are a better option.

Risk Management in Small and Mid Cap Funds
Managing risk is crucial when investing in small and mid-cap funds. These investments can be volatile, but you can mitigate the risk through careful planning:

Long-Term Investment Horizon: To reduce the impact of short-term volatility, invest with a long-term view. A minimum of 7-10 years is recommended for small-cap funds, while mid-cap funds may require 5-7 years.

Periodic Review and Rebalancing: Regularly reviewing your portfolio with the help of a certified financial planner is essential. If your asset allocation shifts too much due to market fluctuations, rebalancing can help maintain your desired risk level.

Diversify Across Sectors: Small and mid-cap funds should not be concentrated in one sector. Diversification across multiple sectors reduces the risk of a particular sector underperforming.

Staying Consistent with SIPs
Investing in small and mid-cap funds via SIPs ensures that you continue to invest through different market cycles. This approach helps in rupee cost averaging, reducing the risk of investing a large sum at the wrong time.

Stay Committed: Continue your SIPs even during market downturns. Market volatility is normal, but over time, these funds have the potential to generate high returns.

Don't Time the Market: It's tempting to stop SIPs when markets are down, but this strategy can hurt your returns. SIPs allow you to buy more units when prices are low, benefiting your overall returns in the long run.

Final Insights
Investing in small and mid-cap funds through SIPs is a great strategy for wealth creation, but it requires a high level of risk tolerance and patience. The key is to diversify wisely, invest for the long term, and seek professional guidance.

Invest in 2 SIPs each for small-cap and mid-cap funds for a balanced approach.

Opt for actively managed funds instead of index funds for better returns and risk management.

Avoid direct funds and invest through regular funds with the help of a certified financial planner for ongoing advice and portfolio management.

Stay disciplined with your SIPs and focus on long-term growth rather than short-term market fluctuations.

By following these strategies, you can make the most of your small and mid-cap fund investments and achieve your financial goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
Money

You may like to see similar questions and answers below

Ramalingam

Ramalingam Kalirajan  |6995 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on May 15, 2024

Listen
Money
Hello sir i want to invest 20k in midcap & small cap mutual fund for next five years ...pls suggest some good mutual funds in this category
Ans: Investing in mid-cap and small-cap mutual funds can offer potential for growth over the long term, although they typically come with higher risk compared to large-cap funds. Here are some recommendations for mid-cap and small-cap mutual funds:

Axis Midcap Fund: This fund has a strong track record of performance and is managed by experienced fund managers. It focuses on investing in mid-cap companies with high growth potential.

Kotak Emerging Equity Fund: Known for its consistent performance, this fund primarily invests in emerging companies with the potential for significant growth. It follows a disciplined investment approach and has delivered competitive returns over the years.

Mirae Asset Emerging Bluechip Fund: This fund invests in both mid-cap and large-cap stocks, offering a blend of growth potential and stability. It has a proven track record of outperforming its benchmark index and peers.

DSP Midcap Fund: Managed by seasoned fund managers, this fund aims to invest in quality mid-cap companies with strong growth prospects. It follows a research-driven investment approach and has delivered competitive returns over the long term.

SBI Small Cap Fund: For exposure to small-cap companies, this fund is a popular choice among investors. It focuses on identifying high-quality small-cap stocks with the potential for significant appreciation.

Before investing, consider factors such as your risk tolerance, investment horizon, and financial goals. It's essential to review the fund's past performance, investment strategy, and expense ratio to make an informed decision. Additionally, consult with a Certified Financial Planner (CFP) for personalized advice tailored to your specific financial situation and goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

..Read more

Ramalingam

Ramalingam Kalirajan  |6995 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 12, 2024

Money
I want to invest 15000 per month. Suggest funds from large cap, large and mid cap, small cap, midcap, flexi cap and multi cap fund
Ans: Let's dive into the details of investing Rs 15,000 per month across different mutual fund categories. This strategy will help diversify your portfolio, maximize returns, and manage risks effectively.

Understanding Mutual Funds
Mutual funds pool money from many investors to invest in stocks, bonds, and other securities. They offer professional management and diversification. This means that your money is spread across various investments, reducing risk. Mutual funds also offer liquidity, allowing you to buy and sell units easily.

Importance of Diversification
Diversification is key in investing. By spreading your money across various funds, you reduce the risk of loss. Different fund categories perform differently under various market conditions. Diversification helps in balancing the risk and return of your portfolio.

Categories of Mutual Funds
Let's explore the different categories of mutual funds you can consider for your Rs 15,000 monthly investment.

Large Cap Funds
Large cap funds invest in well-established companies with a large market capitalization. These companies are often leaders in their industry and have a stable performance history. Investing in large cap funds offers stability and moderate growth. They are less volatile compared to mid cap or small cap funds.

Large and Mid Cap Funds
These funds invest in both large cap and mid cap companies. This blend provides a balance between stability and growth potential. Large and mid cap funds benefit from the stability of large companies and the growth potential of mid-sized companies.

Mid Cap Funds
Mid cap funds invest in medium-sized companies. These companies have significant growth potential but are more volatile than large cap companies. Investing in mid cap funds can offer higher returns, but with higher risk. They are suitable for investors with a moderate to high-risk appetite.

Small Cap Funds
Small cap funds invest in small-sized companies. These companies have the highest growth potential but also the highest risk. Small cap funds are suitable for aggressive investors willing to take higher risks for potentially higher returns. These funds can provide substantial long-term gains.

Flexi Cap Funds
Flexi cap funds invest in companies of all sizes without any market cap restrictions. This gives fund managers the flexibility to invest in the best opportunities across the market. Flexi cap funds offer diversification and the potential for higher returns by taking advantage of opportunities across different market caps.

Multi Cap Funds
Multi cap funds invest in large cap, mid cap, and small cap companies. This diversification across various market caps reduces risk and increases potential returns. Multi cap funds are suitable for investors looking for a balanced approach with exposure to all market segments.

Benefits of Actively Managed Funds
Actively managed funds have professional fund managers who actively buy and sell securities to outperform the market. These funds can potentially offer higher returns than index funds, which passively track a market index. Active fund managers use their expertise to identify investment opportunities and manage risks effectively.

Disadvantages of Index Funds
Index funds aim to replicate the performance of a market index. They have lower fees but often provide average returns. They do not actively seek opportunities for higher returns. Index funds also do not protect against market downturns as they cannot adjust their holdings.

Disadvantages of Direct Funds
Direct funds are mutual funds bought directly from the fund house without any intermediary. They have lower expense ratios but lack professional advice. Investing through a Certified Financial Planner (CFP) provides personalized advice, portfolio management, and financial planning, ensuring your investments align with your goals.

Investment Strategy
Here’s a strategy for investing Rs 15,000 per month across different mutual fund categories:

Large Cap Funds: Rs 4,000
Investing Rs 4,000 in large cap funds provides stability and moderate growth. These funds are suitable for conservative investors looking for steady returns.

Large and Mid Cap Funds: Rs 3,000
Allocating Rs 3,000 to large and mid cap funds balances stability and growth. This blend captures the benefits of both large and mid-sized companies.

Mid Cap Funds: Rs 2,500
Investing Rs 2,500 in mid cap funds offers higher growth potential. These funds are suitable for investors with a moderate risk tolerance looking for higher returns.

Small Cap Funds: Rs 2,000
Allocating Rs 2,000 to small cap funds provides exposure to high growth potential. These funds are for aggressive investors willing to take on more risk.

Flexi Cap Funds: Rs 1,500
Investing Rs 1,500 in flexi cap funds offers diversification and flexibility. These funds can adapt to market conditions and take advantage of opportunities across market caps.

Multi Cap Funds: Rs 2,000
Allocating Rs 2,000 to multi cap funds ensures exposure to all market segments. These funds provide a balanced approach with potential for good returns and reduced risk.

Advantages of Mutual Funds
Mutual funds offer several advantages:

Professional Management: Experienced fund managers handle your investments.

Diversification: Spread risk across various securities.

Liquidity: Easy to buy and sell units.

Systematic Investment Plan (SIP): Invest regularly with discipline.

Compounding: Reinvested earnings generate more earnings over time.

Tax Benefits: Certain funds offer tax deductions under Section 80C.

Risks of Mutual Funds
Investing in mutual funds also comes with risks:

Market Risk: Value of investments can fluctuate with market conditions.

Credit Risk: Risk of default by issuers of debt securities.

Interest Rate Risk: Changes in interest rates can affect debt fund returns.

Liquidity Risk: Difficulty in selling securities at desired prices.

Power of Compounding
Compounding is the process where earnings generate more earnings. By reinvesting your earnings, you can grow your investment exponentially over time. The longer you invest, the more significant the impact of compounding. Starting early and investing regularly amplifies the benefits of compounding.

Your decision to invest Rs 15,000 monthly shows a commitment to securing your financial future. Diversifying across various mutual fund categories is a wise strategy. It balances risk and return while taking advantage of market opportunities. Remember, investing is a long-term journey. Stay patient and disciplined for the best results.

It's commendable that you are proactively managing your finances. Your dedication to investing regularly is a significant step towards achieving your financial goals. By diversifying your investments, you are making informed decisions that will benefit you in the long run.

Final Insights
Investing Rs 15,000 per month across different mutual fund categories is a smart move. It balances stability, growth, and diversification. Consider large cap, large and mid cap, mid cap, small cap, flexi cap, and multi cap funds for a well-rounded portfolio. Remember, actively managed funds offer the potential for higher returns compared to index funds. Direct funds may have lower fees, but professional advice from a Certified Financial Planner is invaluable. Keep investing regularly and leverage the power of compounding to grow your wealth. Your disciplined approach and informed decisions will pave the way for a secure financial future.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

..Read more

Latest Questions
Prof Suvasish

Prof Suvasish Mukhopadhyay  |19 Answers  |Ask -

Career Counsellor - Answered on Nov 08, 2024

Prof Suvasish

Prof Suvasish Mukhopadhyay  |19 Answers  |Ask -

Career Counsellor - Answered on Nov 08, 2024

Listen
Career
I am engineer with 16 years of IT experience and now a break of 11 yrs. But in 11 yrs I had been taking Quantitative aptitude lectures as a visiting faculty in various engineering and MBA colleges and also done Mutual fund certification. I haven't been siting but doing many things professionally in last 11 yrs(In my subject of interest as Maths, Teaching, Finance, Accounting, Wealth Management). I was thinking of doing ESG certification. What kind of role I would get if i am CFA ESG certified.I am looking for Professionally and intellectually engaging role where I can contribute to Society. Not a very NGO type( I have tried working with few NGO's)
Ans: I won't recommend you to go for ESG certification unless you are having a background of Env. Engg and Environmental Impact Assessment. The certificate course of ESG is costly also. I would request you to open your own academy ( if off line not possible then online) and go for only one subject. Let me know your age.Focus only on one subject. You have explored many areas and now you are perplexed. Here the questions are assigned to me through rediffmail. So second time whether your question will come to me or not is not known to anyone of us. Due to the policy I can’t share my email ID and Phone Number. But I would request you to follow me in LINKEDIN and send request so that I can accept you, then through LINKEDIN I can counsel you in the future multiple times. Through LINKEDIN I will be readily and easily accessible. I have counselled and changed thousands of lives. As long as I am there I won’t allow you to be defeated. Mind that always I am there with you like an invisible shadow to show you the right career path.

...Read more

Ravi

Ravi Mittal  |403 Answers  |Ask -

Dating, Relationships Expert - Answered on Nov 08, 2024

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

Close  

You haven't logged in yet. To ask a question, Please Log in below
Login

A verification OTP will be sent to this
Mobile Number / Email

Enter OTP
A 6 digit code has been sent to

Resend OTP in120seconds

Dear User, You have not registered yet. Please register by filling the fields below to get expert answers from our Gurus
Sign up

By signing up, you agree to our
Terms & Conditions and Privacy Policy

Already have an account?

Enter OTP
A 6 digit code has been sent to Mobile

Resend OTP in120seconds

x