Small and mid-cap funds being at the base of the hierarchy of the funds that are based on market capitalization and thus they constitute an important part of one’s mutual fund portfolio. Even the best mutual funds which have performed well in recent are the funds from the small and mid-cap funds category as they intend to give higher returns in a short period of time.
But can one totally rely on them and is the outperformance of these funds in comparison to large-cap funds sustainable is the question in the mind of each investor.
The markets suffered the most in September 2012 when the small and mid-cap funds were at their record lowest owing to inadequate demands and higher leverage putting pressure on companies. But Small-cap stocks and mid-cap ones have totally outperformed large-cap funds after the market lows during the financial crisis. Between 2014-2015 the small and mid-cap mutual funds became the best performing delivering a 30 % return in the equity funds category. Whereas large-cap diversifies funds just recorded a 14 percent return.
The great performance of these funds was owing to two reasons –
So, the supply of funds and investing took place where there were great opportunities for growth. But then again, a discussion has aroused in the market that how reliable this outperformance is in the coming years. The studies depicting that if one has high-quality small-cap and medium cap funds in your portfolio which are the securities that have shown profit growth, safety, and a high pay-out, they will still outperform the large-cap competitors and are thus are sustainable for investing.
The basic assumption says that the economic recovery can last for another five years, earnings growth is expected to show higher returns as the market is also expecting 15% approx. earning growth. So, you can go for a 25-30 percent investing in small and mid-cap funds in your portfolio and expect a higher return.