Broader Market Funds Still Hold Promise

I have been interacting with lot of investors and many of them are worried that the market will once again fall, the way it fell last year when the pandemic was just sweeping across the world. Some of the ‘smarter’ investors have even sold their entire holdings and are waiting on the sidelines to re-enter when the market sees a deep correction. To their dismay and frustration, the market is not budging at all. What explains the difference in the reaction of investors between now and last year is the uncertainty. Last year investors were totally unaware of how this pandemic will play out and hence wanted to be safe rather than sorry.

The situation has changed now. Investors are now better informed and there is vaccine and the element of uncertainty is missing. Therefore, I do not see a sharp correction in the market. Yes, there may be a time correction but not the price correction that many naive investors are expecting. This is true even for the broader markets that have gained much more than the frontline indices. The current rally in the mid-cap and small-cap stocks should be put in the right context. This outperformance has come after a continuous underperformance for two and half years between 2018 and the mid of 2020.

Our cover story this time analyses the performance of mid-cap and small-cap funds along with their valuation. We see that small-caps might be little bit stretched at the index level; however, mid-caps are still trading at reasonable valuation. Funds from these categories are meant to be held for more than 7-10 years to generate superior returns. Hence, our advice is to remember the wisdom of Peter Lynch who said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” And we believe the broader market funds still hold promise if invested with appropriate investment horizon.

SHASHIKANT