SIPs in smallcap and midcap funds shine, but don’t invest blindly

Over the last one year, many investors have been using systematic investment plans (SIP) to invest in equity mutual funds. Due to a sharp run-up in the markets, SIPs in small and mid-cap funds have been one of the best performers giving returns as high as 50%.

But financial advisors caution against investing aggressively in these fund categories on the basis of recent returns as valuations are stretched. The NSE Small Cap 250 index now trades at a price to earnings (PE) ratio of 102.84 as against 83.34, a year ago."Do not look at mid-and small-caps from a one-year period, as they could be volatile in the short term," says Amol Joshi, founder, Plan Rupee Investment Services.

Some believe this category is only for investors who have seen a number of equity cycles and understand the risks in such investments. "Though the returns are tempting, the risk in smalland mid-cap funds is far higher. Only investors who understand this, should look at such funds with a time frame of 3-5 years," says Gajendra Kothari, founder, Etica Wealth Management.