The recovery has shocked the market positively, with the government actively encouraging revival and benign monetary conditions likely to continue. This strengthens the FPI inflows. The fund house sees this as a very positive environment for small and mid cap stocks.
The note also noted that mid and small caps have outperformed large caps over the long term. historically, if The Midcap 100 Index has given positive returns in 14 out of 20 years with a CAGR of 15.6%. On a 3-year daily rolling return basis, 64% times the midcap index outperforms the large cap index. Based on 5-year daily rolling returns, the midcap index has outperformed the large cap index by 76 per cent times. Based on 5-year daily rolling returns, 76 per cent of the midcap index has outperformed the large cap index. Bloomberg data shows that mid and small caps outperformed large caps in 12/20 years.
The fund managers of Edelweiss Mutual Fund believe that there will be a higher level of volatility in the small and mid cap segment as compared to the last 12-15 months and possible corrections from time to time.
“Don’t confuse volatility for risk. High volatility is a friend of long-term patient investors. Spreading investments over a period at this level seems prudent. Expect midcap/smallcap outperformance due to broad-based recovery. However, Note that we have already covered some distance on this road,” said Harshad Patwardhan, Chief Investment Officer – Equity at Edelweiss Asset Management.
The fund house says investors should also be wary of potential risks in this segment. Subsequent waves of infection are derailing the economic recovery, which could be risky for small and mid-cap funds. Global central banks reversing benign monetary policy due to inflation could affect the returns of these funds.