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Small Cap vs Large Cap Mutual Funds – What Should I Buy Now that the Market has Fallen So Much after Coronavirus

Highlights

  • Small Cap vs Large Cap Funds –where to invest in as Coronavirus outbreak has sent the market in choppy waters?
  • Make an informed decision based on our recommendations shown in this post

At all points of time, there is confusion in the minds of investors on which category of equity mutual funds to buy-large, mid, small etc. The same is accentuated after the recent market fall post the coronavirus issue. There has been a correction in stocks across the board-large, mid & small caps. Consequently, returns for all kinds of equity funds-large or small – have come down. Let’s compare returns of both categories after the fall.

Fund Category1 week returns (in %)1 month returns (in %)
Large Cap-12.72-32.61
Small Cap-18.56-36.90

As we can see in the last week & month when we have seen maximum correction in the stock markets, large cap funds have fallen lesser than small cap funds even though returns of both categories are negative.

This is because large cap funds are relatively safer than small cap funds since they invest in the biggest & blue chip companies in India like HDFC Bank, Infosys, reliance etc. Small cap funds, on the other hand, invest in relatively smaller companies.  These companies can have irregular cash flows, and when the market downturn happens, these are the entities that take maximum jolt. This is why the risk is relatively higher, so investors tend to take out their money from such funds. Small cap funds, however, have the potential to give better returns in the longer term though since the opportunity to grow is manifold for a business with a smaller base as compared to a large/matured business.

The market has not bottomed out yet, we could see more correction in the near future where in both large & small cap funds could fall. But looking at the valuations, it’s a good time to invest. Here are our recommendations concerning investments in large-cap and small-cap funds in the existing market situation.

  • Investing in large caps would be a better option because  it will help you recover the lost returns faster than small cap funds when the markets bounce 
  • Investments in large cap funds now should result in reasonable returns over the next couple of years.
  • People who have the ability to take a higher risk and have a horizon of 4-5 years can look at investing some part of their portfolios (20-30%) in small caps because they will most likely do well over the next 5 years or so.
  • For first time investors, we would suggest them to invest only in large cap funds right now.
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