It has been a while since market pundits have started predicting the revival of mid cap and small cap segments. According to them, many mid cap and small cap stocks have corrected sharply and are available at attractive valuations now in the market. This makes a strong case for investing in these stocks.
Naturally, many mutual fund investors listening to the conversation are wondering whether they should adopt a similar strategy?
Without getting into the details of whether one should get into these schemes or not, here are a few pointers for you.
One, it is true that the mid cap and small cap segments have corrected sharply. However, attractive valuations alone do not drive up stock prices. There should be conducive environment, too. That explains why most of these stocks do not benefit from the current liquidity-driven rally.
Mid and small cap stocks are likely to stay muted for a while until there is real improvement in the economic scenario. Unless the growth momentum picks up once again, investors would continue to be nervous about the prospects of both mid cap and small cap segments. In an uncertain environment, investors usually dump small and mid cap stocks and take refuge in safer avenues like large caps.
That brings us to large cap stocks. In all probability, the select stocks that have benefited mostly from the current rally are likely to continue their onward march for more time. This again is a sign of how much premium investors are ready to pay for the extra safety in an uncertain environment. Slowly, other large cap stocks may also join the rally.
So, don’t be surprised if large cap stocks have another decent year in 2020.
Where does all this leave mutual fund investors? Well, investors should stick to their mutual fund allocation based on their goals, investment horizon, and risk profile. It is not a great idea to jump in and out of mutual fund categories based on their future prospects because at the end you would end up with just average returns. So, stick to your allocation and remind yourself that even the category of your choice would enjoy its spot under the sun in the coming months.