The sharp sell-off in mid- and small-cap stocks following a massive bull market is now a cause for concern for investors in mid- and small-cap mutual funds. Allocations to these areas have been very strong in recent months, as evidenced by the inflows into mutual funds in these categories. There were recent warnings from market regulator Securities and Exchange Board of India about froth in the sector and moves by several fund houses to restrict inflows into small-cap funds. Given this situation, investors need to be clear about what strategies they will pursue in the future. Here are some ways to deal with it.
Investing through SIP
Investors who regularly invest money in these funds through a systematic investment plan find their investment decisions a little easier. If your investments follow certain asset allocation requirements and are for a long period of time, you should continue with your SIP. Market downturn is not the right time to stop his SIP. The real benefit of the entire process is achieved when prices are low, so costs are averaged out and more units are allocated for the same amount of investment. Those who have decided on the SIP amount with proper planning can continue with the investment process as usual after confirming the level of commitment.
Check for Allocation
Regarding the allocation and weightages in their portfolio, investors must take the most important move. This kind of action should ideally be performed once a year, and those who haven’t already can use the current disruption as an excuse to get it done. The investor must verify whether their current asset allocation differs from their intended allocation. A greater inclination towards shares may result from the price surge in the past year. Should this be the case, some sums would need to be transferred to debt and asset classes would need to be rebalanced.
The second part you need to complete is to look at the distribution of stocks across different market capitalizations. If the allocation to small-cap stocks increases through these investment funds, the required amount must be transferred from the small-cap fund and reallocated to large-cap stocks through the appropriate fund.
No Lump-sum Investment
Many investors choose to invest a lump sum in mutual funds at regular intervals when they deem it appropriate. The situation in small and mid-cap stocks is highly volatile and warrants special attention as valuation concerns have been expressed by many quarters, including fund managers and market regulators. Investing a lump sum in such funds at this time is a very risky move and should be avoided. This is more of an attempt to time the market and is not a wise strategy.
Don’t look at your NAV every day
As a mutual fund investor with exposure to mid-cap and small-cap funds, your time horizon will be at least five years or more. This means that many ups and downs along the way will not affect the final result. This eliminates the need for investors to check their net asset value or investment value every day. Such moves only increase the desire to take immediate action, which can undermine investors’ long-term goals.