In the last three years, an analysis by ETMutualFunds revealed that approximately 84% of mid cap funds and 68% of small cap funds have underperformed against their respective benchmarks.

For mid cap funds, out of 25 funds analyzed, 21 failed to beat their benchmarks, translating to an underperformance rate of 84%. Conversely, only four mid cap funds managed to outperform their benchmarks during this period.

Similarly, among the 22 small cap funds studied, 15 funds did not meet their benchmarks, resulting in a 68% underperformance rate. In contrast, seven small cap funds outperformed their benchmarks.

Several factors contribute to this underperformance, primarily stemming from the inherent volatility of mid and small cap stocks compared to large cap stocks. Economic fluctuations, political changes, and global market trends can cause substantial price swings in these stocks, impacting their performance unpredictably. According to Adhil Shetty, CEO of Bankbazaar.com, effective management of these funds requires a deep understanding of the underlying businesses and their potential for maximizing returns.

For instance, Kotak Emerging Equity Fund, one of the largest mid cap funds, failed to beat its benchmark (Nifty Midcap 150 – TRI), offering a return of 26.07% compared to the benchmark’s 28.62% over the last three years. Similarly, SBI Magnum Midcap Fund and SBI Small Cap Fund also underperformed their respective benchmarks during the same period.

Shetty advises investors to approach mid and small cap investments cautiously, considering the higher risks associated with these categories. These funds are more suitable for investors with a higher risk tolerance and a long-term investment horizon. He emphasizes the importance of maintaining a diversified portfolio, regularly reviewing one’s investment profile, and staying informed about market trends.

Despite recent underperformance, Shetty reassures investors that such periods are part of market cycles, where downturns can often be followed by recovery and growth. Therefore, while short-term fluctuations may cause concern, a prudent and informed approach combined with a long-term perspective can help navigate the complexities of mid and small cap investments effectively.

In conclusion, Shetty suggests that any potential underperformance in these funds should be viewed as a potential opportunity for long-term investors, provided the underlying fundamentals and growth prospects remain strong. Ultimately, investment decisions should align with individual risk appetites, investment horizons, and financial goals.