Before I write about what’s happening with mid and small-cap funds, let me preface this saying, I am not going to tell you whether you should buy these funds or not. I am not going to recommend funds either. I am going to present some interesting data points on what’s been happening and then you can make a decision based on that.
Although headline Nifty and Sensex are near lifetime highs, there has been an intense bloodbath in the broader markets. Here’s how the major headline indices have fared since 2018.
There’s a massive bloodbath outside the top 25 stocks by market-cap. Here’s a more granular look:
| Companies by Mcap ( Lakh crore) | 31-01-2018 | 31-12-2019 | Change |
|---|---|---|---|
| 0 - 25 | 61 | 74 | 21.20% |
| 26-50 | 20 | 21 | 3.90% |
| 51 - 100 | 22 | 20 | -8.30% |
| 101 - 250 | 25 | 24 | -2.60% |
| 251 - 500 | 14 | 11 | -22.00% |
| 501 - 1350 | 8.8 | 5 | -34.80% |
Here’s a more granular breakdown from ICICI MF
Relative valuations
Midcaps
Smallcaps
The near consensus seems to be that 2020 will be year of small and mid-caps. So, should you invest in mid and small-caps? Let’s look at the annual returns of the major Equity fund categories
Last couple of years have been tough. But I don’t think think, it makes sense to invest in mid caps and small caps just because the funds have fallen badly. I think you should just continue investing according to your asset allocation.
As for smallcaps, I personally don’t think they are needed in any portfolio.
Here’s Nifty Smallcap 250 vs Nifty 100
They’ve done nothing with Far higher volatility. In fact, if you would have started invested in 2000, as of today, you would have underperformed Nifty 100 by over 130% cumulatively.
Nifty 100 vs Nifty Midcap 150
I think a decent midcap fund is more than enough. Or a simple combination of Nifty 50+ Nifty Next 50 even.
To conclude, it seems given all the data, there’s a case to made fro overweigting mid and smallcaps but you’ll have to be cognizant that, they may under-perform even further.