Despite the bullish trend in the equity market on hopes of economic turnaround, about 87 equity schemes with assets under management (AUM) of ₹2.43 lakh crore are lagging behind their respective benchmark indices. The equity funds that are trailing behind their benchmarks account for 35 per cent of the total equity AUM of the mutual fund industry at ₹7 lakh crore as of October. The small- and mid-cap stocks have hogged the limelight for all the wrong reasons with 34 schemes still behind the benchmarks. Vinit Sambre, Senior Vice-President & Fund Manager, DSP BlackRock Mutual Fund, who manages about ₹11,000 crore of AUM in small-, mid- and micro-cap schemes, shares his view with BusinessLine on the prospects of this sector. Excerpts:

Do you think too much money is chasing few mid-cap stocks?

Yes. Over the last three years, we have seen interest levels in mid-cap stocks have gone up. However, at the same time the category has also grown. We have seen many good new issuances. Many small- and medium-sized companies have hit the market to raise capital. In other words, the category is at an interesting phase at the moment.

Do you expect sharp fall in small- and mid-cap stocks with rejig of portfolio by MFs to meet new SEBI norms on classification of mid-, small- and large-cap stocks?

The latest SEBI regulation reclassifying the large-, mid-, and small-cap categories is a positive move and is expected to bring uniformity across various products. This would also help investors to make correct comparison across funds. The realignment of portfolio required across different schemes to adhere to the new norms would raise the level of volatility, especially in the small- and mid-cap names. However, the volatility can be controlled by spreading the exercise over a longer period of time.

Has the fund flow into mid- and small-cap stocks slowed down? What kind of returns can investors expect from this sector?

Yes. There has been some moderation in the quantum of flows in the mid- and small-cap funds. While it is not prudent to talk about future returns, we continue to remain confident about the ability of our small- and mid-cap funds to outperform the large-cap funds over the longer term, say three-four years. This is possible as the rate of earnings growth of small- and mid-cap companies can potentially surpass that of large-caps due to their lower base.

Has the risk attached to investment in mid- and small-cap schemes increased after the recent volatility in these stocks?

Due to the massive run-up in the small- and mid-cap stocks we believe that there are many companies whose valuations have gone much ahead of their historical valuation range. While some of it could be justified due to the expectation of pick-up in earnings momentum in future, they are yet to pick up in a meaningful way. I believe, there seems to be some excesses created in some stocks. Hence, the risk to that extent looks high and some kind of correction is warranted. This could be an absolute correction or time correction.

What is your advice for investors looking to invest in mid- and small-cap schemes?

Investors should avoid entering small- and mid-cap stocks with a short-term view based on the performance of the last one-two years. There is, however, a strong case for investing in this segment with a three-four-year view, as earnings momentum will accelerate from hereon, which will make this segment an attractive investment proposition.