Small, mid-cap mutual funds may outperform large caps in 2021! Here's what to expect

Financial year 2021-22 is expected to be a very strong year from growth perspective due to lower base effect. The year 2020 has been highly volatile for equity markets. There was a sharp fall of around 40-50% in February and March followed by an equally sharp recovery since then taking markets to new highs. Analysts believe small caps and mid caps will have an edge over large caps in this year.

"We expect mid caps and small caps to gain relatively more than the large caps in 2021. The growth in earnings during a recovery phase will be high in midcaps and small caps along with valuation multiple expansion. We accordingly believe mid cap and small cap funds offer a better investment opportunity at current levels," says Sachin Jain, Research Analyst, ICICI Securities.

Small and mid cap mutual funds in the last six months have seen huge returns of over 35% on an average. The best performing schemes in the small and mid cap category have seen returns like 75% and 41% respectively. Should investors invest in these schemes with similar return expectations? Absolutely not, say fund managers. They caution investors against looking at point-to-point returns.

"The markets are a slave of earnings. If corporate earning keeps on growing at 10 to 12%, the markets will keep on giving you that returns. Not necessarily in a linear fashion. What you have witnessed in the last six months, will not be repeated, your normalised returns over long period have been around 10% or 12% or 15%. Those are the kind of return expectation an investor should have in mind. Investors should watch corporate earnings rather than watching markets," says Shridatta Bhandwaldar Head Equities Canara Robeco Mutual Fund.

Bhandwaldar explains, different asset classes - large cap, mid cap or small cap have different risk profile, different volatility, with different return expectations based on different investment horizons. All these four factors, the volatility, ability of the investors to take volatility, the investment horizon and the return expectation have to be kept in mind wile allocating money in any of these mutual fund categories.

Equity mutual fund investors should stick to their asset allocation plan and invest in a staggered manner via SIPs to gain from the volatility in the market. Investors should refrain from timing the markets.

"I keep on telling investors to spend time in market rather than timing the market. Timing is impossible. Spending time is what investors should get into in the market," says Bhandwaldar.

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