The year 2013 thus far, has seen several shifts in sentiments for the Indian equity markets. While the launch of 3rd round of quantitative easing by the U.S. Federal Reserve (in September 2012) and appointment of Mr P. Chidambaram as the new Finance Minister, encouraged markets to move upwards (due to reform measures taken in September last year), which mainly provided a fillip to stocks in the mid and small cap domain; in the new year 2013 bullishness ebbed and the equity markets started drifting down since February 2013.
 

Who has fared better in 2013 thus far?

Base: Rs 10,000
Data as on November 29, 2013
(Source: ACE MF, PersonalFN Research)
So the mid and small caps which went up ferociously earlier in 2012, descended in 2013 and even now in the last four months while they have scaled upwards, wealth erosion in the space is evident. Speaking about large caps, while they too did witness a roller coaster ride as the markets paved, a noteworthy point is that, some trait of they being relatively safe during uncertain times is seen.

You see the Indian equity markets were surrounded by host of detrimental macroeconomic variables in 2013, such as:
 

• Pressure on the Indian rupee
• Widening Current Account Deficit (CAD)
• Probability of slippage in fiscal deficit target
• Risk of a sovereign rating downgrade
• Inflationary pressures creeping in yet again (mainly attributed by food inflation)
• Hike in policy rates
• Lull in industrial activity
• Slowdown in economic growth
• Scam stories unveiling
• Political uncertainty
• Global economic factors (viz. meltdown of Cyprus’s banking system, situation of debt-overhang persisting in the Euro zone and talks of possible tapering in stimulus by the U.S. Federal Reserve through a reduction in the current pace of the bond-buying programme)
   

And even now as we are approaching the end of this calendar year, the concerns over most of the aforementioned macroeconomic factors remain.

It is noteworthy that while the Indian equity markets at present are once again scaling near the recent all-time high of 21,239.36 clocked on November 03, 2013 (on Muhurat trading day), the chart above makes it evident that mid and small caps are yet faltering as compared to large caps.

So what strategy equity investors should follow?
Going forward, amid uncertainty looming around and speculation of the U.S. Federal Reserve stimulus tapering having resurfaced in last few days (due to growing sense that stimulus programme may come to an end sooner rather than later); the mid and small caps are likely to be more vulnerable while the large caps may be relatively resilient.

Hence PersonalFN is of the view that under present macroeconomic scenario, staying with large cap funds may prove to be beneficial for investors. Having said this, those who have a slightly high risk appetite may consider investing in multi cap and flexi cap funds which have a mandate to invest across market capitalisations. PersonalFN believes investing in mid & small cap focused funds may prove to be extremely risky at present. While selecting funds for your portfolio, one shouldn't blindly follow large cap funds that have gone up in the recent past, but also recognise your risk appetite before investing. Considering long term track record and analysing the potential of the fund is imperative. Also prefer mutual fund schemes from fund houses which follow strong investment processes and systems.

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