BackMid- and small-cap funds are needed for long-term portfolios
Before choosing a mid- and small-cap fund, an investor needs to keep a few things in mind
Premium
From a long-term point of view, what is your take on small-cap funds? I have seen that they have gone up quite a bit. I already have investments in large-cap funds and a diversified fund.
—Jayesh
Funds that invest in smaller companies in the market, categorized as mid- and small-cap funds, should be an essential part of any long-term portfolio. The reason is that these funds have the potential to act as the growth engine for generating higher returns for your investments. Smaller companies have more headroom for growth than their larger counterparts and could easily outshine the latter when it comes to portfolio performance.
Mutual funds are the ideal way to invest in such companies since such funds offer the benefit of diversification that is essential to protect yourself against the associated risks. Although the net asset value of such funds display more volatility than large-cap or broadly diversified funds, over the long run, they have proven themselves to be high performers.
Before choosing a mid- and small-cap fund, an investor needs to keep a few things in mind. The universe of such stocks is larger than large-caps and the probability of making wrong choices is higher. A fund manager’s track record (as reflected in a fund’s performance) in terms of choosing the winners is essential. Even so, given that different fund managers use different filters and parameters to select investments, it would be better to go with multiple funds in this category. For example, if you choose one large-cap and one diversified fund for your portfolio, and if between these you have allocated 80% of your money, it would be better to choose two mid- and small-cap funds for the remaining 20%. Presently, good mid- and small-cap funds you can consider include BNP Paribas Mid-cap, ICICI Prudential Value Discovery, and HDFC Mid-cap Opportunities.
What role does the frequency of Systematic Investment Plans (SIPs) play on one’s investments?
—Bhaskar
SIPs into mutual funds can be done at different frequencies. Mutual fund companies offer a variety of options—daily, weekly, monthly, and even quarterly frequencies. The decision to go with a particular frequency should depend on the investor’s convenience. The most popular frequency is monthly since it matches a typical investor’s income cash flow (in the form of salary) with their investment cash flow (in the form of an SIP). There are no particular benefits to be derived from choosing a different frequency. Empirical tests have not shown any reliable, significant difference between, say, investing on a monthly basis and investing on a daily basis. So, sticking to the frequency that is most convenient to you in terms of managing your finances would be the best policy.
Queries and views at mintmoney@livemint.com
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
