Is this a good time to buy mid cap and small cap mutual funds?

Is this a good time to buy mid cap and small cap mutual funds

Last Updated on

Social media seems to be an excellent psychological indicator of market sentiment. When the doomsday and recession forwards increase, investors with financial needs decades away should probably buy more equity!  Among those who see this as an opportunity, some wish to know “is this a good time to buy mid cap and small cap mutual funds?” The answer is not a simple yes or no. We need to ask the question in a different way.

Before we begin, If you are working with a SEBI registered fee-only financial advisor (from my list or elsewhere), please help by providing feedback via this survey. We have had a phenomenal response so far, thank all for your time!!

Midcap Index market trend

Using the Nifty Valuation Tool (you can use this to find if the market is expensive or cheap in multiple ways) we can quickly check market trends in the mid cap and small cap space (I shall present results for mid cap alone here).

I shall only present results here. To find out more about how to interpret results for each indicator, please consult: Find out if the stock market is expensive or cheap in multiple ways

The double moving average shows midcap index price to be below both the 1Y and 6month average with the 188-day line below the 364-day line. If we go by past history, this is a buy signal.

Nifty Midcap 150 Double moving averagesThe trend and volatility indicator,  Bollinger bands show good separation with the price hitting the lower band. This is generally considered as buy signal again. Read more: Spotting market trends with Bollinger BandsNifty Midcap 150 Bollinger BandsThe mid cap index PE is also reasonably favourable (although the history is quite short). It could go down further, but that does not mean one needs to wait.

So we now buy mid cap and small cap funds?

I am not irresponsible to offer a simple yes or no answer to this. I will provide a qualified  “no, do not buy” response.  Why? Most investors who ask questions like these have no strategy (they will not be asking if they had one!). So please first get yourself an investment strategy first.

If you hold multicap funds plus or minus aggressive hybrid funds, then I suggest you continue investing in them. Let the fund manager worry about increasing allocation to mid caps or small caps. This is the most straightforward, safest approach suitable for everyone.

If you insist on having individual large cap (LC), mid cap (MC) and small cap (SC) funds, then take a moment to understand asset allocation. Suppose you decide to have an equity portfolio with 50% LC, 25% MC and 25% SC and started investing two years ago via SIP.

Today the asset allocation would be 52% LC, 26% MC, 21% SC (for the funds selected, think of this as only a trend). That should automatically tell you what to do! Rest the equity allocation back to 50% LC, 25% MC and 25% SC and you will automatically buy more of small caps. There is no need to look at market trends!

For the example, considered here, 4% of the LC fund holding should be sold, 5% of MC holding sold and added to the SC folio. It would be a 16% increase in the SC folio. Do you have the guts to do this? Or will you still think about adding new investments in your MC and SC funds?

If you manage the additional risk from mid cap and small cap holdings, the returns will automatically fall in place. For this, you will need to have a target asset allocation and rebalance as mentioned from time to time. Buying on market dips is a waste of time

The problem is that many investors believe that they manage portfolio risk by changing the amounts that they invest, where they invest and when. This is plain silly. We need to tell ourselves that we are going to get rich. The amount we invest each month will soon be 1% of our invested amount. After that, it will become 0.1%.

Once we adopt that attitude, we recognise that we need to worry about the money already invested and not the money that we are about to invest (at least not as much).

So if you want gains from midcaps and small caps (funds or stocks), have an asset allocation and control it from time to time. The rest will fall in place.

Do share if you found this useful

About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media

Content Policy

Freefincal has original unbiased, conflict-of-interest-free,  topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policy Our website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.

Do check out my books

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingMy first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.  It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantGamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.


  1. If someone is investing for fisrt time, is this the right time ? The allocation can be same as mentioned in article.

Leave a Reply

Your email address will not be published. Required fields are marked *