The hidden dangers in your soaring mid- & small-cap funds

Here's the problem with good times - they don't last forever (Just ask Vijay Mallya). We failed to learn this lesson during the 2003-2007 bull run, when investors poured in Rs 6,700 crore in mid and small caps, only to watch them nosedive by 80 per cent the following year. History repeated itself between 2014 and 2017. As the markets rose, investors grew complacent, pumping in more and more money every year (from Rs 9,700 crore in 2014 to Rs 14,800 crore in 2017). Cruelly, the mid and small caps sunk again, this time by a considerable 40 to 60 per cent between 2018 and March 2020. You may argue that things are different now and that this is India's decade. We believe so, too. In our April 2023 cover story, 'Let India Make You Rich,' we had said, "The growth engine fitted into the Indian economy is so powerful that if you hitch your wagon to it, it'll take you along on the journey to wealth and prosperity." But what we don't believe is the Duracell-like sustainability of the current mid- and small-cap frenzy. Even good times need a breather. Yet, this isn't to say we are against mid- and small-cap funds. In fact, we'd be foolish to stay away from the raging mid- and small-cap bulls. After all, these two cohorts have vaulted investors' money by a whopping 60 per cent in the last 12 months. No wonder cash has been flowing into these funds, with expectations to collect over Rs 20,000 crore each for a third straight year. The fundamentals support them as well. Between March 2020 and March 2024, the profits of mid- and small-cap companies collectively vaulted 65 per cent, more than twice the growth of large caps. Usually, when profits rise, so do their stocks, which is what has happened in the mid- and small-cap space, as you can see below. Clearly, the headline numbers are in good health. But all we are saying is that their cur

This article was originally published on July 15, 2024.