Mid-cap and small-cap funds are designed to generate long-term financial gains by investing equity and equity-related instruments of companies with small and medium market capitalisation.

Mid-cap funds have higher risk as the companies are not as mature. However, the volatility is still less than the small-cap funds. Small-cap funds, meanwhile, have a higher risk compared to the other two funds as they invest in young companies which have high volatility in share prices.

Data shows several mid-cap and small-cap funds have outperformed their large-cap peers over the previous year.

The S&P BSE MidCap Index, which measures the performance of mid-cap funds, has increased by 50 percent in one year.

According to Archit Gupta, Founder and CEO, Clear, the S&P BSE Smallcap Index, which shows the performance of small-cap funds, has risen by around 73 percent in one year. Consequently, the BSE Sensex, which tracks the market capitalisation of India’s top 30 stocks, has risen by 45 percent over the past year.

“The S&P BSE MidCap Index has offered annualised returns of over 11 percent over the past five years. The S&P BSE Smallcap Index has generated annualised returns of over 15 percent over the last five years. Investors who have stayed with mid-cap funds and small-cap funds for a time frame of over five years have seen double-digit returns,” said Gupta.

Taking about investments in these funds, Gupta said that individuals must have a horizon of over 6-7 years.

“Medium and small-sized companies need time to realise their potential, and short-term investors may stay away from them. They are generally volatile investments in the short to medium term. For instance, midcap funds and small-cap funds crashed heavily in 2018 and 2019. The Nifty Midcap 100 crashed 30 percent between January 2018 and October 2019. The S&P BSE Smallcap Index hit an over three year low in March 2020,” added Gupta.

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Adding to this, Vijay Singhania, Chairman, TradeSmart said that when the market increases - mid-cap and small-cap react sharply and are on an uptrend. Similarly, in adverse market situations, mid-cap and small-cap go down.

However, in the long term, the performance of these funds is good.

"It is important to note that any exchange reviews the composition of indices periodically, and few shares are added/removed at the time of review. The review is based on certain parameters like market cap, volatility, a market leader in a particular sector, etc. If we do the stock wise analyses then, we shall find that the stocks which remain consistently in indices, perform better as compared to their peers," Singhania added.

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First Published:Aug 25, 2021 1:58 PM IST