Undeniably, Small and Midcap Funds have been performing well than many other types of funds. And, irrespective of the changes in the market, this trend is not expected to change anytime sooner. So, if you are thinking to invest in these funds, there are some things that you must consider.
Small-cap funds are the stocks that lie at the bottom of market valuation. On the contrary, Mid- caps are the stocks that come between small and large-cap funds. While these two are one of the prominent funds that offer good returns, there are some aspects to consider while choosing.
So, when it comes to investing in these Small and Midcap Funds, here is how you can choose these funds:
Here are some of the factors that you should watch while picking small-cap funds:
- Record of Promoters:
First and foremost, you must check the track record of the promoters. Find out when the promoters came into this business and how long it’s been to their presence. Furthermore, see if a strong team backs them. Do a thorough research about them before taking any decision.
- The stake of Promoters:
If the promoter has a high stake, it reflects how confident he is regarding this business. If you want, you can even question the plans of promoters when it comes to increasing the stake. While investing in small-cap funds, you should be extra careful. Out of all the other aspects, don’t forget to consider the holding of the promoter, return on equity, shares, and debt-to-equity ratio.
- Business Model:
If the company has a unique and substantial business model, its chances for development, in the long run, will be more. On the other hand, if the company deals with such areas that have been influenced by richness, it might shut down sooner than expected. This consideration is valid for both Small and Midcap Funds.
When it comes to selecting the right mid-cap fund, consider the following factors:
Before investing in these funds, one thing that you must know is that here, volatility is inevitable. Thus, you would have to strategize your investment and would have to be a bit more cautious while picking the funds. Also, you must consider investing for a long-term in these funds, say three to five years to safeguard your investment from volatility to a certain extent.
- Investment Challenges:
Most people live with a misconception that every other mid-cap fund is trackable. However, the truth is that brokerages and research houses only track few of them. Thus, there is a dearth of information on these companies. In such a scenario, investing a huge amount becomes quite risky. Hence, before investing, conduct a deeper research about the past, present, and the future of the company.
- Exit Strategy:
Another issue with mid-cap funds is to decide when to make an exit. Moreover, considering the volatility of these funds, you must have an exit strategy. Most of the times, investors can’t decide the correct time to sell, even if they had bought the funds at the right time. Thus, pen down the exit strategy first, and based on that, you can choose a relevant fund.
Conducting a thorough research before investing in any of the funds is extremely important. Talk to other investors, consult advisors, research on the internet, and collect as much information as you can before investing.