Investors parking their money in midcap fund investments have lost heavily as the market volatility dragged down the value of most midcap companies down. In fact, midcap fund category funds have lost more heavily than their large-cap counterparts resulting in many investors questioning the validity of their investments and inquiring if they are likely to face more pain with the market plunging deep into the red zone owing to myriad factors.
There is no doubt that midcap schemes suffer to a large extent when the market goes into a nosedive. Many investors who may have parked money into midcap schemes are now considering a pullback in a bid to save their capital. However, is this temporary panic and brouhaha worth consideration?
Already invested in midcap funds?
To start with, midcap funds are equity mutual funds that invest in the stocks of mid-sized companies. Companies ranked between 101 and 250 based on market capitalization are classified in the midcap category.
Those who have invested in midcap funds through systematic investment plans (SIPs) owing to the high returns earned by some of them in the past must be aware of the following details. These include:
Midcap funds are equity mutual funds that you must stay invested in for at least five years. Hoping to garner returns within the first few months or years is nothing short of folly. It takes at least five years for the investment to yield good returns, which means that you must continue to invest in these funds through SIPs. Many people put their SIPs on hold or stop them altogether or redeem their investments to avoid further losses. This is a costly mistake when you look at investments from a long-term perspective. Volatility is inherent to most equity fund investments. The current market situation was unforeseen, but that does not mean that there would be no end to the uncertainty and ambiguity that investors are facing right now. Insisting on regular SIPs is the easiest way to continue your stint in the market and see your portfolio returns mature with time.
Midcap funds tend to underperform for a while before assuming a full-fledged form that yields returns beyond inflation. In fact, prolonged investments in midcap funds can help you earn returns over the long term. This means that you must ready your mind to stay invested for a prolonged period, say 10-15 years, if you want to benefit from this category of funds.
Risk versus returns
There is an inherent risk factor that is a deciding factor in terms of returns. Midcap funds are risky as they invest in companies that can either grow into large-cap institutions or go bankrupt. Investors must be prepared and willing to take the risk before putting their money into these funds.
Managing midcap funds is not easy as fund managers have to constantly churn the portfolio companies to ensure optimum returns while mitigating the risk associated with non-performing component companies. This explains why some of these funds charge higher than large-cap funds. A higher expense ratio can eat into your returns in the long run, which means investors must be ready to pay that extra amount to see their funds perform.
Thinking of entering the midcap space?
If you are stepping into the midcap mutual fund space, it would do a lot better if you look beyond just the current returns or a drop in the indices at present. Check how the investments are performing in adverse market conditions. Find out how your choice of investments has fared compared to its peers. For example, observe if they have fallen down more than other funds or have remained relatively stable. With a sharp fall in stocks, it is not unusual for funds to follow suit. The fall may be more pronounced in some funds. Next, you must check how quickly these funds have rebounded in sync with the market rise. A long-term view is much needed before stepping into the midcap space.
Viral Bhatt, Founder & Owner, Money Mantra says, “Right now after downside in equity stocks and too much volatility, investors can surely think mid-cap funds vis the SIP route mode. We recommend mid-cap equity mutual funds to investors only if you have an investment horizon of at least seven to ten years. If they are planning to invest in options like mid-cap schemes or small-cap schemes, we insist they should have a longer investment horizon and the ability to withstand lots of volatility and short-term losses.”
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