Don’t have an appetite for risk? Settle for multi-cap schemes

Don’t get shocked if you hear demeaning remarks coming from your financial advisor next time like you are better off in a multi-cap fund if you don’t have the stomach for mid or small-cap funds. Today many advisors are playing it safe as they were facing a regular complain about the abysmal performance of small- and mid-cap investments from their clients.

What they were informing the clients are to try to find refuge in multi-cap funds if they can’t stomach volatility in small- and mid-cap schemes. The fund manager in a mutli-cap scheme has the liberty to change between market caps basing on the market circumstances and nothing like small and midcap schemes. westhill consulting

While the multi-cap cap category has retuned around 3%, the mid- and small-cap category has returned around 0.1% in the past one year. ”The mid- and small-cap category has a tendency to underperform the broad market at regular intervals.

For instance, the category is in the chucks in the same one and three-year periods. It has returned positively only in the five-year period,” says an investment consultant, who doesn’t want to be named. As per Value Research, a mutual fund tracking firm, the mid- and small-cap category has given a negative return of 2.6% in the three-year period.

Nonetheless, it has delivered around 18.8% in the five-year period. “Some clients just can’t be convinced that these schemes still have the potential to deliver superior returns, as they may lead the next rally.
That is why we started telling them to stay away from mid- and small-cap schemes and opt for multi-cap schemes,” he adds.

Dhruva Raj Chatterji, senior investment consultant, India, Morningstar Investment Management, says mid- and small-cap category is meant only for investors with a higher risk appetite. “This segment was badly hammered in June-July and also in the last year. It also didn’t recover in the recent rally that started sometime in September-October. That is why the performance of these schemes looks very bad from a three-year perspective,” he says. “The category always tends to suffer more in a bad market.

But they also give exceptional return in a particular year.” His prescription — investors without a higher risk appetite, stomach for volatility and longer investment timeframe should stay away from the mid- and small-cap sector.