Mutual funds: Mid & small-cap mutual funds gave 18-20% returns in 10 years. Should you invest for short duration?

Mid- and small-cap funds have delivered excellent returns over a 10-year period on paper, but only some investors would have earned these published returns. Aniruddha Bose, Chief Business Officer, FinEdge, “If you were to dissect these returns closely, you would find phases of extreme optimism and pessimism. There have been money-doubling years as well as years which saw 30-40% corrections. When an asset class is this volatile, it becomes challenging to remain invested without letting your emotions get in the way. The key to success with small and mid-caps is to invest with a clear understanding of the risks involved and in a disciplined manner through systematic investments rather than chasing returns or timing the market.”

So, if your goals are for the long term and you understand their risks clearly, systematic investment plans (SIPs) in the small- and mid-cap space can be considered a good smart Investment. 

However, Col. Sanjeev Govila (Retd), CEO of financial planning firm Hum Fauji Initiatives, says, “One may invest but with caution. Mid and small-caps can potentially deliver high returns but also carry higher risk. Investors should only invest in these funds if they have a long-term investment horizon and can stomach the volatility. For instance, historical returns are encouraging, but assessing the current market conditions and outlook for mid and small-cap stocks is essential. One must evaluate company-specific factors like growth potential, management quality, and financial health. Besides, one must consider their risk tolerance and portfolio diversification before investing in mid and small-cap stocks.”

Mid & small-caps have delivered 18-20% returns in the last 10 years 

Source: FundsIndia 

Should you take a bet on short-term investments in such funds? 

Mid and small-caps are best suited for long-term goals. If you need the money in the next 5 years, investing in safer assets like large-caps or debt products is best. Mid- and small-caps could be a good option if you aim to retire in 20 years. However, it will help if you always prepare yourself for the volatility of these investments in the interim periods.

If you’re looking for short-term gains, it’s best to invest in safer assets like large caps or bonds, say experts. Additionally, Bose said, “Taking a short-term bet in small and mid-cap funds would be an unwise move. These funds tend to be extremely volatile and can erode your capital quickly if you approach them with a speculative mindset. The fact that investors often take bets based on short-term past returns over the preceding 6 or 12 months makes matters even worse, as they are left high and dry when the cycle inevitably reverses.”

Espousing similar views, Govila said, “I would not recommend investing in mid and small caps for the short term. These funds are more volatile than large caps, so there's a greater risk of losing money in the short term. Short-term investing in mid and small-cap funds can be volatile and risky. Short-term bets in this segment are for long-time veterans who are very strong on fundamental research, technical analysis, and decoding market trends, with emotional biases well-controlled.”

Things to keep in mind while investing in small and mid-caps 

Before you invest in any mid or small-cap stock, make sure you do your research and understand the company’s business model, financials, and competitive landscape. Govila said, “You must assess the management team's expertise and track record. Focus on companies with strong fundamentals, sustainable business models, and competitive advantages. Ensure you understand the risks involved and invest with the correct expectations.”

Mid and small-caps are more volatile than large-caps, so investing for the long term is important. This will help you ride out any short-term volatility and maximise your chances of achieving your investment goals. Due to higher volatility, be prepared for potential fluctuations in stock prices. Bose said, "One should invest in small and mid-caps with a minimum time horizon of 7-10 years, preferably more. Their long-term growth potential makes them an ideal candidate for goals like retirement, which are usually many years away.”

Don’t put all your eggs in one basket. By diversifying your portfolio, you can reduce your risk and improve your chances of success. Diversify investments across different sectors and stocks to mitigate risk. Bose said, “Make sure you are investing with a comprehensible financial plan, clearly defined goals in mind. Doing this will ensure you are aligned to the big picture and less prone to reactive investment decisions based on short-term volatility.”

You shouldn’t invest in them based on recent past returns. The main problem with investors is that they quickly search for funds that have delivered high returns over the past 6 or 12 months and then invest in them with incorrect expectations and an unclear understanding of the risks involved.