Over the past few years, Mid-cap and Small-cap mutual funds have undeniably captured the spotlight in the Indian investment scene. Their impressive, often eye-popping, returns have far outpaced large-cap benchmarks, drawing record inflows and sparking discussions about whether they are the new engines of wealth creation. Investors are naturally drawn to these segments for their potential to unlock extraordinary growth from fast-evolving companies in sunrise sectors, making them a compelling, albeit exciting, part of a diversified portfolio.
However, the very qualities that make mid and small-cap funds attractive also fuel their inherent volatility. These categories are known for sharper and faster corrections compared to large-caps, making it challenging for investors to remain invested during significant downturns – a ride that can be emotionally draining. Adding to this concern is a recent structural shift: rapid inflows have swelled their Assets Under Management (AUM) multi-fold, leading to potentially stretched valuations. This trend often signals performance-chasing and raises a red flag, as what appears to be a wealth creation story can quickly turn into wealth destruction if underlying risks like valuation bubbles are overlooked.
For Fabits users aiming for long-term wealth, Mid and Small-cap funds certainly deserve a place, but with a strategic and disciplined approach. The key lies in defining your allocation in advance, reviewing it regularly, and rebalancing your portfolio to avoid overexposure, especially after periods of stellar performance. Crucially, accept that drawdowns are an integral part of their journey, and practice behavioural awareness – resist the urge to chase returns in buoyant markets and avoid panic exits during corrections. By balancing their high-growth potential with careful risk management, you can harness the excitement of these funds without compromising your financial well-being.
