Top Reasons and factors when should switch away from small and mid-cap funds

Small and mid-cap mutual funds are equity-oriented schemes which invest in the stocks of small and mid-cap companies of the financial markets. Companies having a market capitalization below Rs. 5000 crores are called small-cap companies while those with a market capitalization of Rs.5000 to Rs.10, 000 crores are called mid-cap companies. Mutual funds which invest in stocks of such companies are called small and mid-cap funds respectively. 

When you invest in the best midcap mutual fund online or the best small-cap fund, you can get the following advantages –

• Attractive returns when the market is bullish

• Equity taxation on your investments

• Quick short-term returns when the markets are rising 

In fact, when the equity market has a positive sentiment, investing in the best midcap mutual fund online or in small-cap funds is quite lucrative. It is because mid and small-cap companies are in their development stages and when they grow, their market valuation rises considerably. Thus, when the market is on a high, the stock of these companies posts the maximum growth allowing you to earn attractive returns. However, the risk profile of such funds cannot be avoided. There are some instances when you should switch away from the top mid-cap fund or small-cap fund which you might have invested into. The top three reasons for such switch are as follows –

1. When the market is expected to correct itself

If the stock market is providing very good returns and the valuation of small and midcap companies is increasing consistently, there might be a market correction in future, especially when the rise in valuation is not supported by the company’s performance. When the correction happens, small and midcap stocks might suffer the highest fall in value. So, if you believe that the market is quite high and might take a corrective course in the near future, you should switch away from small and midcap funds.

2. When the market becomes unstable and uncertain

The recent COVID pandemic was an example when the stock market became highly uncertain and unstable and a crash followed. Though the market is now recovering, if there is another cycle of instability, your small and midcap investments are bound to suffer. Since small and midcap companies face the highest market volatility, you should switch away from such mutual funds when the market starts falling and becomes unstable. By switching away, you can protect your returns from being eroded.

3. If you have a short-term investment horizon

If you have a short-term investment horizon and you would need funds in the next couple of years, switching away from small and midcap funds would be ideal. This is because these funds are highly volatile and if the market becomes bearish, you might end up losing your capital. So, unless you have a long term horizon, try and switch your investments from the top mid-cap funds to other mutual fund schemes for better returns.

Investment in small and midcap funds should be done only when you understand the inherent risk-return trade-off of your investment. You can get the best returns through the top mid-cap funds and small-cap funds but you should also know when you switch your investments to preserve your returns. So, manage your investments wisely for maximum gains. 

To invest in a suitable mutual fund scheme, you can download the ETMONEY App on your Smartphone. The ETMONEY App helps you to invest in the best midcap mutual fund online and also switch your investments when needed. So, use the ETMONEY App to invest and also for managing your investments as per changing market dynamics.