Cautious over small and mid caps?

(Source: Moneycontrol)

(Source Businessline)

Spotting a trend?

Mr Jinesh Gopani, the head of equities at Axis Mutual Fund declared in an interview to Moneycontrol that the valuations observed in midcap funds is too high for comfort. 

DSP Blackrock decided to temporarily stop accepting new inflows to its pathbreaking Microcap fund from 20th Feb 2017. From April 2013 to Dec 2016 the funds size increased from Rs 307 crores to Rs 4323 crores. NAV of most small cap funds have swelled up more than 45% in the last one year.

TATA PE Fund - 50%

L&T Emerging Business - 50%

DSPBR Microcap - 48.2%

Principal Emerging Bluechip - 47.92%

Source: https://goo.gl/4U5rme

What could be the reasons?

Reason 1: High PE - BSE Midcap is trading at a price of close to 38 times earnings which is historic. Sensex is presently trading at a price of 22 times its earnings. 

Reason 2: Absolute return has been 32.57% in just the last one year

Reason 3: Lack of suitable opportunities

Smallcap funds have returned close to 24% in the last 5 years. Although they are the most volatile funds in the market, over a longer term they offer impressive returns.

Does this also mean we may witness a sudden fall in the small and mid cap space?

According to Pankaj Tibrewal (Fund Manager - Equity - Kotak Mutual Fund), most small and mid cap companies depend on the domestic markets for growth. Therefore the application of GST can have a positive impact on them which could augur well for this sector.

Saurabh Mukherjea, who is known to have predicted the 2008 crisis, feels that many mid cap pharma stocks are over valued. He goes on to say that while stock prices have gone up due to more people investing in the markets, earnings are yet to catch up.

However the ones who have invested through SIPs should continue to keep investing and not be bothered if a downturn is around the corner. In fact one must look to increase investments during the downturn. Small and Midcap funds have delivered fantastic value over longer term and thanks to the ELSS scheme, one can also earn tax benefits.

During this phase, it is important to consult one's personal finance advisor to understand the appropriate way ahead.