The stock market is not an uninterrupted path or a reliable source of returns. They have a tendency to rise and fall. Typically, equity mutual funds follow the movements of the equity markets. Compared to large cap stocks, the downturn in small and midcap stocks has been more noticeable. The mid-and small-cap indices have experienced a nearly 25% correction from their peak values. Equity market corrections provide a chance to raise the number of high-quality stocks in the portfolio; however, determining whether a crash is a correction or a slaughter is typically quite challenging. Based on an interview with Mr. Gaurav Goel, (Entrepreneur and SEBI Registered Investment Advisor), let’s find out if investors should sell all their investments in small-cap, mid-cap mutual funds now with the stock market crashing.

Are Your Mutual Funds in Danger? What to Do with Small- & Mid-Caps Now?

Equity Markets do not move in a straight line or give consistent returns. Their nature is to go up and down. Equity Mutual Funds usually move in tandem with equity markets. Currently, we are witnessing a correction, which to our mind is quite normal. In fact, a correction tends to give great opportunities to invest from a long- term perspective. Those who have seen or studied markets will not consider current correction as a danger.

The correction in Small & Midcaps has been more pronounced than the large cap stocks. Mid and Small cap indices have corrected by almost 25% from their all-time highs. The ferocity and the pace of the fall have been quite overwhelming and unnerving for lots of investors. Some of the impatient investors have already succumbed to the pressure and exited. However, we strongly recommend that all those who are still invested should not be fearful and accept this correction as part of the journey. They should focus on realigning their portfolios by selling the crap and adding quality stocks to their portfolio. Retail investors should continue their SIPs and think from a long-term perspective.

Sharp Corrections in Small-Caps-Opportunity or Red Flag?

We view corrections in equity markets as an opportunity to add quality stocks and get rid of “not so good stocks” from the portfolio. Small Caps in particular have corrected sharply from their highs witnessed just a few months back. While the correction has been sharp, one must also realize that valuations were quite expensive earlier. Even now, they are not in the “cheap” territory when we compare them to their long-term averages. It may however make sense to start nibbling into small-cap quality stocks with abnormal corrections. The bulk of the money should remain invested in large cap and banking stocks.

Should Smart Investors Stay Invested in Small-Cap & Mid-Cap Funds during a Crash?

It is usually very difficult to assess whether a crash is a correction or a massacre. We are big advocates of valuations and feel that portfolios should be built/adjusted according to the valuations of different parts of the equity markets. However, it is not always easy or convenient for a normal investor to study the valuations and act accordingly. In such a situation it is better to consult registered investment advisers as they can help allocate according to the market cycles and risk profile of an investor.

Market in Red: Do You Exit Small- & Mid-Cap Funds or Buy the Dip?

Markets in red and black are part and parcel of equity behaviour. Making frequent changes based on daily reds or black is stupidity. It is just not possible to time the markets. Buying the dips makes sense but in tranches. What to buy would depend upon the current valuations.

Is This the Perfect Time to Rebalance Your Portfolio Away from Small & Mid Caps?

At the current juncture, large caps and banking stocks appear more lucrative than mid and small cap stocks. This does not mean that an investor should shift entirely away from broader stocks and jump fully into blue chips. There are quality stocks in the broader space which have corrected massively and are attractive. It’s time to be selective, quality conscious and methodical.

With Valuations Cooling Off, Are Small-Cap Funds Still Worth Holding?

It is certainly not the time to exit quality stocks which have corrected significantly from their highs. However, if an investor’s portfolio has a disproportionate share of small and mid-cap stocks then he should add more weight to the large cap stocks.

Everyone’s Selling Small-Caps-Should You Follow the Crowd?

Crowd reaction is usually knee-jerk in acute market conditions and it does not make sense to follow them blindly. Investors should do research on the stocks they own and then make decisions on their fundamentals and valuations. A helicopter view of the overall portfolio is best advisable.

Are You Exiting Small & Mid Caps Out of Fear or Strategy?

Entry and exit in stocks should always be part of the strategy. Equity markets are a madhouse and a wise investor should always try to find a method in this madness. It is natural for equity markets to keep jumping up and down. Investors who keep reacting to each market jump will end up being a monkeys. We always recommend a long-term view of the equity markets stretching to multiple years for maximizing the gains in equity markets.

Will Selling Small- & Mid-Cap Funds Now Hurt Your Long-Term Returns?

It is impossible to predict accurately in equity markets consistently in the short run. Predicting a sell in Small- & Mid-Cap Funds at the current juncture is like throwing a die and hoping it to land on an even or an odd value depending upon which side you are currently sitting on. However, if your portfolio is disproportionately oriented towards them, then it may make sense to trim it down to a more balanced allocation.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.