Mid- and small-cap funds outperform large-caps

While large-cap funds, in three months, yielded gains of 26.3%, small-cap funds are up 37.9%, and mid-cap funds fetched returns of 29.9%.

Small- and mid-cap funds have started to outperform large-caps, providing some relief to mutual fund (MF) investors who were holding onto their investments despite the prolonged period of underperformance.

Over a three-month period, small-cap funds are up 37.9 per cent, while mid-cap funds fetched returns of 29.9 per cent, showed data from Value Research.

In this period, large-cap funds yielded gains of 26.3 per cent.

Advisors say investors can consider making fresh allocations to mid- and small-cap funds despite the recent uptick in returns.

“From a valuations point of view, the mid- and small-caps are lucratively placed, compared to large-caps.

"Even after the rally, the mid- and small-cap index is around 22 per cent and 41 per cent lower than their respective all-time highs.

"This clearly shows that there is more room for upside,” said Rushabh Desai, a Mumbai-based MF distributor.

“Investors with high risk appetite with six to seven-year investment horizon can see tremendous wealth creation in this space, compared to large-caps.

"Currently, mid- and small-cap to large-cap premium is below long-term averages,” he added.

Since their March 23 lows, mid- and large-cap fund categories have provided average returns of 46 per cent. However, small-cap funds have given higher returns of 51.9 per cent over that period.

Analysts say that re-rating of small- and mid-caps could be on the cards.

“Valuations of small- and mid-cap stocks are looking more attractive, setting them up for a re-rating if the growth outlook improves as we think it will,” said analysts at Morgan Stanley in a note.

“The Covid-19 related lockdown did not help matters, but has marked a floor on the cohort’s relative performance as a forward-looking stock market is possibly anticipating better growth,” the analysts said.

They also pointed out that with monetary aggregates normalising and significant policy action underway with a corporate tax cut last September, the growth is set to turn.

Advisors reckon investors should not get carried away.

“The rally is largely driven by liquidity, so investors should not get carried away.

"They should stick to their asset-allocation strategy and make partial allocation to mid- and small-cap funds as these can help in generating alpha over a longer period,” said Amit Bivalkar, founder and director at Sapient Wealth.

“With the rally being liquidity-driven, we may see some minor correction in the mid- and small-cap space.

"So, investors can deploy half of the allocation they want to now, and the remaining in a staggered manner over two-three months,” Desai said.

Over the past two years, mid- and small-cap funds have lagged large-caps in returns, with few stocks within the frontline benchmark indices driving the markets.

In 2019, mid-cap funds fetched gains of 2.8 per cent, while small-cap funds ended with average losses of 1.5 per cent.

In the same year, large-cap funds ended with gains of 10.5 per cent.

In 2018, mid- and small-cap funds ended with losses of 12.16 per cent and 18.6 per cent, respectively, whereas large-cap funds were able to hold onto the green zone with marginal gains of 1.1 per cent.