A look at mid-cap and small-cap funds and if they are worth your time and money

Experts suggest that those with a high-risk appetite can invest while risk-averse investors should avoid them.

"Mid- and small-cap funds are capable of outpacing their larger peers in the long run," Abhinav Angirish, founder of Investonline, told CNBC-TV18.com.

“When a condition on the stock market is highly volatile and uncertain, mid-cap and small-cap funds are bound to plunge more than large-cap funds, though the fact remains that they generate good returns,” Angirish said.

A salient trend, as per data shared by Angirish, is that in terms of returns, there has been a remarkable overlap between the returns on mid-cap and small-cap mutual funds, but they have outperformed the large-cap funds by a considerable margin between 2020 and 2021.

Talking more about the risks of investing in mid- and small-cap funds, Tejas Khoday, co-founder and CEO of FYERS said, "At some point, every large cap today was once a small- or a mid-cap. However, investing in small companies is riskier because of dodgy financials, immature businesses, and unknown management capabilities. On the other hand, as we know, they can offer much higher returns as they are not yet mature and, by nature, have tremendous scope for growth."

A major handicap for retail investors investing in small- and mid-cap funds is the lack of sufficient brokerage coverage and data access.

"Most equity analysts don't cover small and mid caps," Khoday, said while adding that "it is better to invest via mutual funds or niche portfolio managers specializing in smaller-sized companies".

Overall, investors in these funds should set realistic expectations for returns and tread carefully, Investonline's Angirish said.