In raging bull markets, investors often hesitate to bet on mid- or small-cap-oriented equity funds. Conventional wisdom has it that mid- and small-cap holdings can hurt your portfolio more if the market tanks. That's certainly true. If you evaluate equity-fund returns immediately after a big bear phase, you'll find large-cap funds featuring much lower losses than small-cap or mid-cap funds.
But then, if the market does tank, you should scarcely be selling your equity funds after the steep decline. If you're a wise investor, you would grit your teeth and hold on until your portfolio has had the opportunity to recoup those losses in the next bull phase (which is always round the corner). Remember that when the next up-move materialises, small- and mid-cap funds are likely to move up faster than large-cap funds, pepping up your returns.
To illustrate, exactly one year after the global credit crash unfolded and triggered the market crash in January 2008, large-cap equity funds had lost 52.8 per cent of their peak NAV on an average. If that sounds awful, mid-cap equity funds fell by an even steeper 60.7 per cent and small-cap equity funds were down a gut-wrenching 63.5 per cent. Multi-cap funds managed an in-between loss of 54.1 per cent.
However, at the end of five years from that date (that is in January 2013), mid-cap and multi-cap funds had broken even right along with large-cap funds. In fact, they registered a small positive CAGR of 0.5 per cent and 1.1 per cent as against a nil return on large-cap funds. Small-cap funds were in the red with a negative CAGR of 1.1 per cent. At the end of seven years, with the markets already warming up to the next bull phase, small-cap funds (8.8 per cent CAGR) were back to being the top performers, followed by mid-cap funds (at 8.4 per cent CAGR) and multi-cap funds (7.1 per cent CAGR). Large-cap funds (5.2 per cent) came last.
The lesson from these statistics is that market highs shouldn't really sway your decision to allocate money to equity funds with a mid-cap or small-cap flavour. If you have a long enough horizon and a stomach for risk, don't hesitate to own mid-cap or small-cap funds for a kicker to your portfolio.
If you have a limited sum to invest, multi-cap funds may do a much quicker job of getting you to your long-term goals (10 years plus) than large-cap funds. All you need is the maturity to ignore interim volatility and the perseverance to stay the course.
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