For security reasons, your session has been timed out. To continue, Please login.
Reserve Bank of India (RBI) warned of a bubble-like situation in the Indian equity market. According to the central bank, the stocks are overvalued in relation to the underlying economic health of India and corporate earnings. It’s important to note here that midcap and smallcap space usually have short boom and bust cycles. It helps investors, as Gupta said if they time the market cycle correctly to maximize returns from these funds.
While some investors, especially those on the bullish side of the spectrum, described RBI observation in its annual report for FY 20-21 as alarmist and worth ignoring, for many others the warning could not have come at a better time – in the middle of the second wave of COVID19 that that has proved to be far more deadly and disruptive than the first wave of infection in 2020.
Worse still, the second wave has broken the expectation of a steady recovery in India’s GDP growth and corporate earnings in FY22 from the sharp cuts in the March to July last year due to the first wave.
The equity market has however not taken much note of the potential downside from the second wave and the lockdown enforced across the country to slow down the transmission of infection.
The risks, including Overvaluation
The benchmark BSE Sensex is up 9 percent since the beginning of the current calendar year and has rallied 12.1 percent since the lows it hit in January this year.
This makes it expensive given the downside risk to India’s GDP growth and corporate earnings in FY22 due to the second wave.
The Sensex has however proved much more resilient in the past than the underlying economic and corporate fundamentals. And there is a possibility that it may again do so given the benign liquidity globally and strong buying interest from the foreign institutional investors that are real drivers of the stock markets in India.
This is largely due to the disproportionately faster rise in the mid and small-cap index than in the large cap index.
The BSE Mid-Cap index for example is up 24 percent year-to-date and 48 percent since the beginning of January 2020. The Small-Cap index has done even better. It’s up 32 per cent year-to-date and 74 percent since January 2020.
In other words, mid-cap investors made twice the money that of large-cap investors in the last 17 months while small-cap investors have been 3X better than large-cap investors.
The midcap mutual fund category has offered an average return of 70 percent over one year. Similarly, the NIFTY smallcap 100, which is the benchmark for smallcap funds, has delivered 114 percent return over one year.
It’s important to note here that midcap and smallcap space usually have short boom and bust cycles. It helps investors,if they time the market cycle correctly to maximize returns from these funds.
List of the top 3 Midcap and Smallcap Funds
|5 Year Return||Mid Cap||Small Cap|
|1||Axis Midcap Fund-Reg (G)||SBI Small Cap Fund-Reg (G)|
|2||PGIM India Midcap Opp Fund-Reg (G)||Nippon India Small Cap Fund (G)|
|3||Kotak Emerging Equity Fund (G)||Axis Small Cap Fund-Reg (G)|
|3 Year Return||Mid Cap||Small Cap|
|1||PGIM India Midcap Opp Fund-Reg (G)||Quant Small Cap Fund (G)|
|2||Quant Mid Cap Fund (G)||Axis Small Cap Fund-Reg (G)|
|3||Axis Mid Cap Fund-Reg (G)||Kotak Small Cap Fund (G)|
Midcap funds and smallcap funds are more impacted by macroeconomic factors as compared to large-cap funds. Moreover, one gets the best performance from these funds only if they can pick smallcap funds and midcap funds when the bear market is bottoming out,” he mentioned.
So, he said it would help if investors pay close attention to the management of this midcap and smallcap companies and the company financials and opt for midcap funds and smallcap funds with a lower expense ratio to increase the take home-return.
On talking about profit booking from a category,it totally depends on the overexposure of the category in the overall portfolio.
Analysts says those who have made gains in mid- and small-caps over the last one year should book partial profits and buy more of heavyweight stocks such as Larsen & Toubro, Pidilite Industries Reliance Industries, HDFC Bank, Siemens, Tata Steel and Bharti Airtel
Investors should not form decisions just by looking at midcap or smallcap funds in the portfolio. The overall allocation to mid and smallcaps depends upon concentration in the multicap, flexicap, large, mid and smallcap portfolios.
One’s overall exposure can be 15-30 percent in midcap and 5-20 percent in smallcap. However, it is important to note here that every investor’s risk profile is different.
Unless the current allocation crosses more than 5 percent above the designated allocation due to the recent market rally, there is no need to rebalance. Investors should also ensure that allocation is in highly ranked funds and switching to better-ranked funds is always preferable. They can trust fund managers to handle the matter of investing in deserving stocks, even if the market looks expensive.
The index stocks are also better placed to absorb the economic disruption from the second COVID19 wave compared to the smaller companies. In fact, nearly a quarter of the Sensex earnings come from companies with substantial global revenues and profits least impacted by COVID19 slowdown in the Indian economy. This could mean that Sensex in particular and large cap stocks in general may outperform mid and small-cap stocks over the next 12 months.
As a thumb-rule, large-cap and index stocks popular with large institutional investors such as insurance companies and FIIs should now comprise at least 50 per cent of your portfolio. Don’t exit mid and small cap space altogether, just go underweight on them.
Finally, overall asset allocation should be reviewed on a quarterly basis. It is best for individuals to work with a wealth manager or financial adviser who can guide on the prospects of various funds in different categories.