The experts highlighted that investors should not select funds only by looking at past returns. Differences in stock selection, portfolio construction, cash allocation, fund management and market-cap exposure can lead to significant variation in performance even within the same category.
Salim said investors evaluating funds for the next two to three years should focus on factors such as rolling returns, portfolio quality, risk metrics and downside management.
He noted that funds with disciplined valuations, reasonable portfolio turnover and a focus on businesses with healthy return ratios could be better positioned across different market conditions.
“My clear thought on this is a midcap category label tells you where the fund invests in. It doesn’t tell you how the fund is positioned or how it invests.”
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Biswas stressed the importance of understanding how a fund manages risk. He pointed to diversification across stocks and market-cap segments as one way of reducing the impact of individual holdings and managing volatility. He also said investors should understand the fund manager’s investment process and risk preferences before making a decision.
For smallcap funds, the experts flagged fund size as another factor to watch. Very large funds may face challenges in maintaining flexibility in a segment where liquidity can be limited. Investors should therefore consider whether a fund’s size could affect its ability to move across opportunities.
The discussion also highlighted the role of active management in the small- and midcap segment. While passive strategies have become increasingly popular in large caps, Salim said information inefficiencies, risk management and liquidity considerations could continue to create a role for active funds in smaller companies.
“Don’t allocate 100% to this entire small and midcap space.”
The broader message for investors is to avoid chasing recent performance or market trends. Maintaining a diversified portfolio, assessing downside risks and staying disciplined could be important as investors navigate volatility in the small- and mid-cap segment.
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