Are you in loss with mid- and small-cap mutual funds?:Exit now and absorb loss or continue investing? Here’s what experts say

The small-cap and mid-cap mutual funds have given a rollercoaster ride to the investors, lately. After scaling to substantial highs by 2024 end, the benchmark category indices Nifty SmallCap 100 and Nifty MidCap 100 have largely declined. As a result, investors who started SIP in schemes at the upcycle are all trapped. What should such investors do? Lovelesh Sharma, the co-founder of MarketFeds Analytics, says that small and midcap stocks have taken a bit of a beating recently. To put it in fancy market terms, a whopping 76% of the stocks in the Nifty Smallcap100 and 50% of the Nifty Midcap100 are trading below their long-term moving averages. Basically, this means that a lot of these stocks have been underperforming, and investors are getting a little nervous. Valuations: Still a Concern? Sharma also points out that valuations in the small and midcap space have been a worry for a while now, along with earnings and liquidity. Valuations are basically how much a company is worth compared to its earnings and assets. If valuations are too high, it means the stock might be overpriced. ICICI Prudential MF resumes subscriptions for small-cap funds There’s a bit of good news, though! ICICI Prudential mutual fund has opened up subscriptions for its small cap fund after a while. This suggests that they see some value in the market. However, Sharma cautions that only a small percentage of stocks look truly attractive right now, and overall, valuations are still pretty high. Bull Run Over? Expect Consolidation Remember that amazing run small and midcap stocks had from 2022 to 2024? (Well, Sharma thinks that party might be winding down. He believes we’re heading into a period of consolidation, which means things might be a bit choppy, and you’ll need to be selective about what you invest in. Patience will be key!) Long-Term View: Positive Okay, so it might not be smooth sailing in the short term, but Sharma emphasizes that if you’re investing in midcaps and small caps, you need to have a long-term perspective – at least five years. Historically, these stocks have delivered impressive returns. Over the past 10 years, the Equity Midcap100 has returned over 16.7%, and the SmallCap100 has returned over 12.7%. That’s pretty awesome! If you can handle the ups and downs (and there will be ups and downs!), small and midcaps can be a valuable addition to your portfolio. Which Funds to Consider? So, you’re thinking about diving in? Sharma suggests a few good fund options: Small Cap Funds: Quant Smallcap, Nippon India Smallcap, or Invesco India Smallcap. Midcap Funds: Motilal Oswal Midcap, Nippon India Growth Midcap, and HDFC Midcap Fund. Don’t Forget Flexi Cap Funds! Sharma also recommends having a flexi cap fund in your portfolio. These schemes invest in companies of all sizes, giving you a bit more diversification. He suggests looking at Parag Parikh Flexi Cap Fund or HDFC Flexi Cap Fund, especially those with lower expense ratios (the fees you pay to have the fund managed). Quality Matters: Pradip Halder’s Take Pradip Halder, the CEO of PHD Capital, has a word of caution: don’t just blindly buy small stocks that are down 60-70% from their all-time highs. Just because a stock is cheap doesn’t mean it’s a good buy! Halder says you should focus on quality stocks that are making good profits. Makes sense, right? Near-Term Volatility Expected Halder also agrees that small cap stocks are likely to be volatile in the near term, maybe for the next six months or so. But he’s still optimistic about the long-term prospects. The Bottom Line: Be Smart, Be Patient So, what’s the takeaway from all of this? Small and midcap stocks can be a great way to grow your wealth, but they’re not for the faint of heart. Do your research, be selective, and be prepared to ride out some volatility. And most importantly, have a long-term investment horizon.