The small and mid-cap segments have been under tremendous pressure for about three years. The broader markets are typically known to be much more volatile than the large-cap space and they have stayed true to their element even during the correction seen in March. At a time when most of the market seems to be on a rally, there still are pockets of opportunities available in the broader markets.
Currently, it can be said that equity markets, in terms of valuations, are in a neutral zone—they are neither cheap nor expensive. As a result, a staggered way of investment is recommended. The frothiness in valuations of the midcap and small-cap segment is not there any longer, and the segment has corrected itself compared to the large-cap in the past few years. This is at a time when global markets, including domestic ones, have rebounded sharply, recovering most of the losses incurred due to the pandemic in the backdrop of the GDP drop, earnings drop and uncertain economic environment. It has been a classic case of markets climbing a wall of worry. This has led to many investors missing out on the V-shaped recovery. Hence, a staggered way of investment at this juncture into midcap and small-cap is recommended to enable participation in the equity markets and in the meantime limiting the downside risks.
Some key triggers that may influence markets are macro factors like inflation, interest rates, economic activity, vaccine rollout and global central banks’ stances. A scenario of rising uncertainty on macro factors and a low-interest-rate environment calls for a staggered approach to investing in midcap and small-cap funds. This would help in limiting downside risks.
Fund Selection
When it comes to investing in broader markets, ICICI Prudential’s schemes are among the best performing funds in their respective categories. This has been largely possible because of their exposure to large-cap companies in certain sectors where midcaps are not present and exposure to certain small-cap companies that hold the potential to become future midcaps, thus bringing an interesting blend into the portfolio. The schemes are nimble enough to take opportunities presented by the market. It is a known fact that these schemes have a stringent investment process and a well-thought-out investment strategy.
In the small-cap space, the fund house believes that despite the rally seen in benchmark and broader market indices, there are several names on a bottom-up basis that have not participated in the rally thus far, and are well placed for a reasonable upside over the next one to three years. Even from a cyclical perspective, there are many companies that are favourably placed from a risk-reward perspective. Here, the point to note is that since these stories take time to play out, it is important for the investor to stay invested for at least five years. Therefore, the optimal approach here would be to invest through SIPs as they allow the investor to take exposure to markets at varying levels and benefit from cost averaging over the long term.
Invest through SIP
To successfully manage risk in midcap and small-cap investments, it is best for an investor to invest in a regular and consistent manner. This approach ensures that the long tenure of the investment takes care of the risk as it gets distributed across the investment period. By investing systematically, one opens the door to generate higher returns, as the companies continue on the potential growth path during the same period.
The author is the director of Biju Associates.