With 23% and 17% annualized return over the past three years respectively, mid and small-cap funds have comfortably beaten multi-cap and large-cap funds. This superior performance could easily tempt investors to bet big on this segment. "Investors are looking at aggressive investments based purely on mid- and small-cap funds' past performance," says experts
Experts advise against hiking exposure to this segment. It has the potential to deliver high returns, but exhibits much higher volatility and is particularly vulnerable when markets turn sour. At a broader level, there is a perception that valuations in these segments are stretched. Several funds have recognized this problem and, to protect their return profile, have stopped accepting fresh money.
Small- & mid-cap funds have fared well
But experts warn against lopsided bets in this segment based on past performance
Investing more in these funds is risky
The size of the average small- and midcap fund is now 23% larger than the average large-cap fund's size.
If you have already invested in mid- and small-cap mutual funds, stick with the level of exposure you are comfortable with. If you have not invested in these funds, you should resist the temptation to do so now. From a purely risk-return perspective, large-cap funds are better positioned at this juncture while multi-cap funds are ideally placed to dynamically manage the marketcap exposure. Most multi-cap funds are currently tilted in favour of large-cap stocks.