Should you exit small and mid-cap funds now?

The year 2017 was a great year for investors who invested in mid-cap and small-cap funds as these funds delivered superlative returns of 43% as compared to the large cap funds’ returns of around 30%. No wonder, this relative outperformance of the mid-cap and large-cap funds attracted hordes of investors to these funds, resulting in huge inflows into these funds.

But with the markets going into correction and consolidation mode, the year 2018 has been disappointing for the mid-cap and small-cap fund investors. The mid-cap and small-cap funds have corrected more than the large-cap funds and investors in these funds are clueless about their next course of action.

Here is what you should do if you have mid-cap and small-cap funds in your portfolio. If your exposure to the mid-cap and small-cap funds is high, say 50% to 70% of the portfolio, you can hold these funds for the long term without worrying about the short term volatility in the markets. Alternatively, you may sell some of the mid-cap and small-cap funds to reduce your exposure to these funds to around one-third (30%-35%) of your portfolio. This would help prevent further decline in the value of your investments should the market take a further downturn. If you are investing in mid/small-cap funds through SIPs, it would be advisable to stop the SIPs of these funds and start SIPs of large-cap and multi-cap funds.

Also, if you have invested in mid-cap and small-cap funds to achieve some of your short term financial goals, it would be advisable to delink the objective from the investment. Any investment in equity mutual funds has to be from a long term perspective to achieve your long term financial goals. For short term goals, you can invest your money in fixed deposits of banks or liquid funds.