Should mutual fund investors worry about the drop in Small-cap and Mid-cap stocks ?

In the recent times, the small-cap and mid-cap index has been facing volatility which is the main concern for the investors currently. With the continuous fall in these indices, the first-time mutual fund investors, as well as existing investors of small-cap and mid-cap funds, are in a dilemma while taking the investment decisions.

In the last week at an aggregate level, the small-cap schemes except close-ended schemes have given a negative return of 2.5 per cent and mid-cap schemes provided negative return of 1.5 per cent. At the same time the Small-cap and mid-cap index have declined by 3 and 1 per cent, respectively since January 15, 2017.

Many investors are considering the budget anticipation as a primary factor behind this fall. But if we go through the fundamental of these indices and the stocks involved in it, then it can be clearly observed that this correction is due to the higher valuations. However, many experts are not considering that this correction will last as there are no such triggers in the economy for a long-term correction.

If we analyse the yearly returns of small-cap and mid-cap mutual fund categories, then we can see that these schemes have returned around 50 per cent (small cap) and 38.5 per cent (mid-cap) in past one year. After a year of growth in mid-cap and small-cap funds and stocks, the short-term correction would not make any difference to investors.

In the current market scenario and considering the high valuations of small-cap and mid-cap stocks it is not wise to enter into small-cap and mid-cap schemes. So, the first time investors should wait for the bounce back into the indices. However, existing investors should adopt the wait-and-watch strategy as it will be more effective rather than getting out of the schemes as the current economic environment won’t suggest a major setback in this space, so existing investor should stay invested in these schemes and should not worry about the current volatility.