I can take moderately high risk and am looking to invest in mid and small-cap funds. Do you suggest a fund combining small-caps and mid-caps, like SBI Small & Mid-cap or one which has only mid-caps, for instance, HDFC Mid-Cap Opportunities?

Gowtham

It is not clear what your goals are, how much you want to invest and what timeline you have in mind for this investment.

Mid and small-cap stocks have had a good run in the past two years, based on expectations of high earnings growth as the economy revives.

Today, trailing valuations of the BSE MidCap (25 times) and BSE SmallCap (58.6 times) indices stand much higher than the Sensex’s 19.7 times.

With most of the stocks in this space having moved up sharply, it is not advisable to invest in mid-cap/mid and small-cap funds at this juncture unless you have a high risk appetite and a long-term perspective.

Coming to the fund choices, usually, mid and small-cap funds change allocations between these two segments based on market conditions.

Considering that small-cap valuations have expanded substantially, SBI Small and Midcap fund, for instance, now holds only about 16 per cent of its portfolio in small-cap stocks, compared to 28 per cent a year ago. Similarly, when the tide favours small-caps, mid-cap funds may take limited exposures to small-cap stocks to give a boost to returns.

Both HDFC Mid-Cap Opportunities and SBI Small and Midcap have scored better than their benchmarks during market rallies and falls since 2011.

In terms of consistency in beating the benchmark, HDFC Mid-Cap Opportunities has an edge. On a one-year rolling return basis, the fund has outshone the benchmark 97 per cent of the time in the last five years.

SBI Small and Midcap has a less attractive one-year rolling return of 85 per cent for the five-year period.

On the other hand, over one, three and five-year periods, SBI Small and Midcap has earned much higher returns than HDFC Mid-Cap Opportunities.

Ultimately, where to invest will be based on how much more risk you are willing to take to earn higher returns.

Also, keep in mind that ideally, mid and small-cap funds should be just additions to your portfolio, with the core portfolio made of diversified equity funds with a good track record. If you don’t yet have any investments in diversified funds, we recommend you spare some of your surplus to invest in them alongside.

I am 33. I run SIPs of ₹500 each in the following funds: UTI Mastershare, DSPBR Top 100, SBI Emerging Businesses, Tata Ethical and L&T Infrastructure.

Should I continue investing for the next 20 years? I also want to start new SIPs in global energy-based funds and a fund investing in the US markets.

  Madhav Joshi

Here are a few observations about your portfolio. First, for a small sum of ₹2,500 every month, you are investing in too many funds. It is enough if you invest in one fund at this point in time.

Secondly, with SIPs in sector funds (Tata Ethical and L&T Infrastructure) which generally carry higher risk than diversified funds, your fund choices also seem wanting. More so, with your plans to invest in global energy funds whose prospects have dwindled due to factors such as the economic slowdown in China and oversupply situation in the last one-two years.

Stop SIPs in all funds except UTI Mastershare. Invest the entire sum of ₹2,500 per month in this fund. You can add more diversified funds as and when your surplus increases.

If you foresee expenses in US dollars over the long term, it may be a good idea to invest in US-based funds as a diversifier. You could consider Franklin India Feeder US Opportunities for this purpose.

It is good to know that you are planning well in advance for your financial goals and are looking at a 20-year horizon.

But you will still need to monitor the performance of your portfolio and replace underperformers periodically.

Send your queries to mf@thehindu.co.in

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