These six small and midcap funds caught Dhirendra Kumar's fancy. Check them out

Dhirendra Kumar, CEO, Value Research, says among midcaps, he likes Principal Emerging Bluechip, SBI Magnum Multicap and L&T Midcap. Among small-caps, DSP BlackRock Small Cap Fund, Reliance Small Cap and SBI Small Cap Fund are his favourites.

Majority of the experts we are talking to are saying that for the next one year, strength is going to remain restricted to large caps and the midcaps will continue to underperform. What do you do with your MF holdings? 

This is usually the case in a shaken market. The small-cap space struggles and when you look at one week, one month, three month’s performance, a 2% decline in a small cap fund is a very usual thing. This kind of movement is actually visible on a day to day basis. Even so, it is not yet a unnerving situation. Unnerving was what happened in 2008, a free fall, a decline of 70%, Rs 100 turning into Rs 30 -- that kind of situation. We are far from that. 

Last year, the small cap funds were up, on an average of 60% and this was substantially higher than all other categories while large caps had moderate returns. 

When you compare this and look at the three-year, five-year and 10-year performance of the small cap funds, there you actually see performance. Last three years, they were up 20% annualised, last five years, they were up 30% annualised. For 10 years, the starting point is 2008 -- the worst time in the market, just before the decline and that is also an impressive 15%.’ 

In the small cap universe, the variants between the best performer and the average performer is substantial. There is a lesson here. If an investor accidentally landed into small caps last year and were expecting it to go up in a nice straight line as a 50% return yielding fund, then they are in for a surprise. They have no reason to expect such a performance. 

For all the people who are accumulating their savings, just keep calm and carry on. Do nothing, carry on with your SIP. This is a great vehicle for somebody who can withstand the decline and accumulate at lower levels. You must ensure that you are investing for three to five years time at least and you are not getting unnerved. 

Do not look at the NAVs on a day-to-day basis. The good thing that has happened is that the small cap funds will remain small caps in all times to come, going by SEBI classification. There is a far greater predictability of style purity which you buy into when going for small-caps. If you have accidentally drifted into small cap funds and made some money and are now witnessing a decline in the value of your investment, take your money out and go on a holiday. 

In the midcap category, the Motilal OswalNSE 0.64 % Midcap 30 Fund has given negative returns out of the entire bunch. There is about half a per cent decline. There is also the Indianbulls Value Discovery Small Cap Fund which has given a negative one per cent kind of return. Do you think when the market rises, eventually any and every fund will make up the losses? So should one just stay put? 

Yes, mutual funds add substantial value. I would go by a fund which has proven its mettle over a longer period and most investors look at one-year and six months’ return. They get attracted to it. They try and ride it and that may not be a sound strategy because in India the decline in value, the fall is so substantial. It is important to have a fund which is a little more consistent, declines less in a falling market and rises reasonably in a rising market. That seems to be the secret of the great returns that one can derive from such funds. 

Of course, the range of return in the small caps will be very wide. The best performer and the worst performer could be very embarrassing and the best performer could be unbelievable. But do not go by the numbers only. Look at two phase of the market because it is important that in the last three, three-and-a-half years, we are only seeing one side of the market, which is markets going up. Even looking at three-year return could mislead you and take you to a fund which might be assuming far greater risk. That risk might become more visible this year. 

So, look at our star rating, look at the five-year return, look at the bad phase of the market and how that fund did and you will be able to spot those. Investors today have a wide choice among small caps and midcaps which will remain that way in times to come. 

What would you recommend in mid-cap funds despite it being tough times for such funds ?

Let me say two important things which every investor should keep in mind while investing in small caps and mid-caps that remain promising in the long term. If these two variables are not in place, they will be disappointed. They must have five years and a longer time frame and they should not be investing lump sum. They should not try to time it. Work on any method but be a regular investor. 

Coming to my recommendations of fund that I like among midcaps, Principal Emerging Bluechip, SB  Magnum Multicap and L&T Midcap are fairly attractive funds; the good thing that has happened is that midcaps are now well defined. 

Earlier, midcap funds used to turn big and they became a multi-cap fund and a large cap fund. It is no longer so. The problem is that you have to keep an eye on their turning big and that becomes an impediment to their performance. 

Among the small caps, the DSP BlackRock Small Cap Fund which was the erstwhile microcap fund, investing in smaller companies; Reliance Small Cap and SBI Small Cap Fund which was erstwhile SBI Mid and Small Cap Fund.