Is it a good time to invest in smallcap and midcap mutual funds?

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After a dismal show in 2018 and 2019, the mid and smallcap companies have finally delivered exceptional performance in the latest Q4 earnings.

Both the mid and smallcap indices are at all-time highs. Last year, 25 out of 51 funds registered over 100% returns.

So, should you also hop on to the smallcap and midcap party?

“Such strong outperformance in the mid and small cap segments has come after a couple of weak years. If you are an investor with short-term goals, I’d advise you to be cautious while investing in mid and small cap schemes since you might be going for something that has already shot up quite significantly. However, for long-term investors, investing in these funds can be a good option,” Vishal Dhawan, CEO of Plan Ahead Wealth Advisors, told Money9.

Duration?

Staying invested for a longer duration triggers the compounding effects. But how long should the waiting period be, especially in case of small and midcaps?

“On an average, the equity cycle of these funds is supposed to be 7-10 years. Wealth is generated only when companies grow larger and this essentially takes some time. In no ordinary circumstance will a smallcap company convert to mid cap within a span of 12 months. You need patience to receive robust returns in the long run,” Dhawan said.

Choosing a fund

Another aspect of mid and smallcap funds that often leaves investors confused is the wide variety of funds available to choose from. How does an investor pick one or two specific funds out of a pool of options that will bear fruitful results later?

“Since no solid third party research is available on mid and small caps funds, it’s important to understand the investment philosophy of the particular mutual fund manager who is managing these funds. Apart from doing a research on the fund manager’s past stock recommendations, going through the consistent track records of the funds can be very valuable. Always look to find consistency in these funds,” said Dhawan.