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Mutual fund investments have garnered significant interest, especially among the younger generation. But the big question remains: where should one invest for maximum returns? Should you lean towards small-cap funds or mid-cap funds?
Which option carries less risk? Understanding these factors can make investment planning much simpler and more effective.
Table of Contents:
- Higher Returns: The Big Attraction
- Will This Trend Continue?
- Understanding Time Correction & Price Correction
- Average Returns of Mid-Cap & Small-Cap Funds
- As of August 2024
- Don’t Let Confusion Overwhelm You
- Stick to Your SIPs
- Which is better to invest in, small-cap or mid-cap funds?
Higher Returns: The Big Attraction
When it comes to mutual fund investments, a considerable number of investors are drawn to small-cap and mid-cap funds. Why? Over the past decade, these funds have shown remarkable returns.
For instance, even the worst-performing small-cap fund has delivered an average return of around 16.5% over the last ten years. Compare that with the best-performing large-cap fund, which yielded approximately 16% in the same period.
Surprisingly, even the lowest-ranked small-cap fund outshines some of the best large-cap options. No wonder so many investors are choosing mid-cap and small-cap funds to form a significant part of their portfolios.
Will This Trend Continue?
While the past decade has been fruitful for small-cap and mid-cap funds, it raises an important question: can this trend be expected to continue? Should you keep investing in small-cap funds as you have been?
Should a large portion of your portfolio still be dedicated to small-cap funds? Before making such decisions, it’s crucial to understand the concepts of time correction and price correction in the stock market.
Is the higher return worth the risk? What are the potential pitfalls?
Understanding Time Correction & Price Correction
In the stock market, when a stock that has consistently performed well suddenly stops providing significant returns or experiences a decline, this is known as time correction.
Essentially, a stock or sector that has been on a steady upward trend might enter a phase where it trades within a narrow range without major upward or downward movement. This is what we call time correction. Even large stocks like ITC, Reliance Industries, and Microsoft have gone through such phases.
On the other hand, price correction happens when a stock exceeds its average valuation, reaching a peak, and then gradually declines back to its average price. Both time and price corrections are crucial concepts that investors need to understand.
Take the example of IT stocks during the pandemic (2020-21). They saw a massive surge, only to experience a price correction in 2022-23, when many investors began facing losses. Price corrections like this can happen in various sectors.
Average Returns of Mid-Cap & Small-Cap Funds
As of August 2024, over the last 10 years, small-cap and mid-cap funds have delivered impressive returns, and it’s essential for investors to be aware of these averages.
For instance, large-cap stocks typically yield around 12% annually over a decade, while well-performing large-cap funds can deliver about 14% per year. In contrast, mid-cap stocks can offer an average annual return of 16%, and small-cap funds can provide a higher return of around 18% annually. This data reflects long-term averages.
As of August 2024
In the past year alone, small-cap indices have given average returns of around 45%. Over two years, the return stands at 34%, three-year averages at 25%, and five-year averages at 32%. These figures clearly indicate that small-cap funds have outperformed other categories, delivering significantly higher returns.
As for the mid-cap index, it returned 49% in the past year, 33% over two years, 24% over three years, and 28% over five years. Even mid-cap funds have performed remarkably well, with valuations peaking in recent times.
Don’t Let Confusion Overwhelm You
Given the strong trajectory of the Indian economy, increasing foreign investments, and growing retail participation, small-cap and mid-cap indices have surged to new highs. In such an environment, investors may wonder what their next move should be.
When a stock or index reaches a 52-week high, volatility often increases. Price drops might happen, but it’s important for investors not to panic. There’s strong optimism that the market will continue to grow in the long term.
So, what’s the best course of action? Exiting your investments or pulling out of the market may not be the wisest move. The key is to stay invested for the long term to reap maximum returns.
Stick to Your SIPs
One thing to never stop? Your SIPs. Continuing your SIPs even during market corrections ensures that you’re averaging your costs and potentially increasing your overall returns. Whether you’re invested in small-cap or mid-cap funds, consistency is key. Stopping your investments in the middle can be a costly mistake.
Which is better to invest in, small-cap or mid-cap funds?
Mid-cap funds fall in the middle of the risk spectrum—riskier than large-cap funds but less risky than small-cap ones. Small-cap funds, on the other hand, carry the highest risk among the three. But does higher risk mean they should be avoided? Not necessarily.
Despite the volatility, small-cap funds offer immense growth potential, especially for investors with a long-term outlook. Mid-caps, while more stable, can also provide substantial returns, making them an attractive option for those seeking a balance between risk and reward.
So, which one is better? It depends on your risk appetite and investment horizon. Are you willing to ride out the ups and downs for potentially higher rewards, or do you prefer a safer, steady path with mid-caps? The answer lies in understanding what suits your financial goals best!
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