Since the beginning of 2013, equity markets have witnessed several shifts in sentiments. After the U.S. Federal Reserves launched the 3rd round of quantitative easing in September 2012, equity markets partied across the globe. Indian markets too rallied sharply and on the onset of 2013, it was believed that they were set to record fresh highs. Appointment of Mr. P. Chidambaram as new Finance Minister encouraged markets since he announced some reformative measures and gave a roadmap to cut back on fiscal deficit. Midcap indices went up ferociously and outperformed broader markets, while the large cap index underperformed.

However, the bullishness ebbed and markets started drifting down in February 2013.
 

Outperformance S&P BSE Sensex

Data September 23, 2013
(Source: ACE MF, PersonalFN research)  

You see, the macroeconomic variables were disturbed. Ballooning Current Account Deficit (CAD) depicted a worrisome picture, amid a weakening Indian rupee against the U.S. dollar. Huge gold imports had pushed the import bill very high, along with escalation in prices of Brent crude oil. Moreover, slump in economic growth added to tension.

You see, as rupee nosedived, Indian equity markets too witnessed a roller coaster ride. What's more; speculations about winding down of quantitative easing programme in the U.S. caused investors go bullish on the U.S. as its treasury yields went up significantly there garnering interest of many to invest in U.S markets. This resulted in even higher outflows from emerging markets. Downbeat economic variables in domestic economy made Indian equity markets more vulnerable to outflows than other major developing markets. And in such a scenario, the small cap companies took the hit and are yet languishing.

In the recent past market mood turned positive again after newly appointed RBI governor announced slew of measures to protect the Indian rupee. Continuation of monetary stimulus in the U.S. brought in excitement and sent markets near their all-time highs again. But midcaps are still down.

Mutual fund investors have not been spared either. Performance of large cap oriented funds has been better than those in the mid and small cap category.
 

How various categories of diversified mutual funds have fared?

Category	Category Average Returns (Absolute %)
	1 Month	3 Months	1 Year	02-Sept-13 To 23-Sept-13	YTD
Large cap Oriented Funds	7.1	2.7	2.1	5.7	-3.4
Mid & Small cap Oriented Funds	4.8	-3.2	-4.0	5.1	-13.9
Multi-Flexi-Opportunities Funds	6.4	1.4	-0.1	5.2	-6.6
Value Oriented Funds	6.0	0.0	-2.1	5.2	-8.9
S&P BSE 200	7.5	2.4	1.9	6.0	-3.8
S&P BSE SENSEX	7.5	6.0	6.1	5.4	2.4
S&P BSE Mid-Cap	4.6	-7.2	-12.9	4.3	-21.2
S&P BSE 500	7.1	1.8	0.4	5.8	-5.6

NAV Date: September 23, 2013
(Source: ACE MF, PersonalFN research)  

The table above depicts that S&P BSE Sensex has outperformed S&P BSE-Mid-Cap and S&P BSE 200 across all time horizons. Large cap funds, although have underperformed S&P BSE Sensex on most of occasions; they have outperformed S&P BSE 200 thus proving their superiority over broader markets. On the other hand, mid & small cap oriented funds have performed measurably across time frames. In the recent up-move witnessed after U.S. continued with its monetary stimulus and Dr. Rajan took over as the new RBI governor, midcap oriented funds have performed in line with broader markets. But considering the massive fall they witnessed in the past, recent recovery would do little to shore up confidence of investors. Performance of multi-flexi-opportunities oriented funds and that of those following value style has been mixed.
 

Which category is dominating the show?

	1 Month	3 Months	1 Year	02-Sept-13 To 23-Sept-13	YTD
% of Large cap Funds outperforming S&P BSE 200	28%	68%	56%	40%	56%
% of Mid & Small cap Funds outperforming S&P BSE 200	5%	0%	24%	22%	3%
% of Multi-Flexi-Opportunities Funds outperforming S&P BSE 200	13%	43%	43%	25%	33%
% of Value Oriented Funds outperforming S&P BSE 200	9%	23%	27%	18%	23%

NAV Date: September 23, 2013
(Source: ACE MF, PersonalFN research)  

As remains the question of individual performances; more than half of large cap oriented funds have outperformed S&P BSE 200 over last one year. Mid cap and value oriented funds have failed to do so. Investors have favoured largecaps even in the recent rally that started at the beginning of September. Failure of value oriented funds reveals that investors are still going with momentum. Clearly, large cap oriented funds have dominated the show till now. Now the question is, should you consider them even now or you would be better off investing in mid and small cap oriented funds since they have fallen a lot?

Let's see what might work the best for you?

Superior performance of S&P BSE Sensex and relative underperformance of S&P BSE 200 shows that investors have restricted themselves only to some of India's most tracked bluechip stocks. This suggests that investors are still cautious about sustainability of rallies and have been avoiding risking money in mid cap space.

At present, Indian economy is passing through a rough patch. Industrial growth has been dismal and inflation is inching upwards again. Indian rupee still looks vulnerable to external shocks. Citing all these factors RBI hiked repo rates by 0.25% at the second quarter mid-review of monetary policy. Repo rate hike makes almost all loans costly since it affects the cost of funds to the bank. Higher interest rates may delay the capex cycle revival. Furthermore, higher Marginal Standing Facility (MSF) rates and restrictions on borrowings by banks under Liquidity Adjustment Facility window would put pressure on banks.

On the global front, although the U.S. has continued providing monetary stimulus for now, no clarity has been given about how long the stimulus would be in force. This would keep flow of capital to emerging markets unstable and erratic.

PersonalFN is of the view that, under present macro-economic 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, you 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

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