In view of the current situation, what's your outlook for mid- and small-cap funds?

In a report, the World Bank has recently mentioned that the Indian economy is likely to slow down in the next two years. You have said that the large-cap mutual funds should be the preference. But what's your outlook for mid-cap, small-cap and sectoral funds?
- Ratnakar

My outlook for large-cap funds is that as and when the markets turn around, which doesn't happen immediately but whenever that happens, large caps tend to lead the market. Whenever there is any panic buying, it normally happens through index funds and ETFs, which are heavy with large-cap stocks. So, blue chips tend to lead the momentum during the market turnaround. Even during panic selling, large caps were tanking more freely than the others.

The case for mid-size and smaller companies is also the same that when the economy does well, they tend to grow faster. But that takes time and consequently, the better performance of small- and mid-cap funds takes time. And right now, all the growth prospects are in cold storage.

This article was originally published on April 20, 2020.