Small Caps Funds can Boost Your Portfolio



Small and mid-cap funds have given over 90% returns in the past year. No wonder, financial advisors get many enquiries about their prospects.

One set of investors wants to know whether it is time to get out of these funds. The second group wants to know whether they can still expect similar returns in the coming days. According to experts, individual investors should shut the noise out and focus on their portfolio.

If you have exceeded your allocation target to small and mid-cap funds, bring it back to the original target. If you are looking to invest, make sure that your exposure to them doesn't exceed 30-40% of your total equity portfolio. All equity portfolios should have 60% exposure to large-cap funds and based on their risk appetite investors can take a small exposure to mid-cap and small-cap funds.

Risky, But Rewarding

It is easy to get carried away when the market is doing well and small and mid cap funds are doing well. But one should try to figure out how to these fund work before getting into them. Sure, these funds can give you phenomenal returns, but they can also be volatile in different periods.

That is one point most investment advisors want investors to keep in mind. For example, almost always large companies tend to do better in a lacklustre market. This is mainly because they have the strength to withstand a bad economic phase because of their size. In comparison, small-and medium-size companies fare badly when the times are tough. However, when the economic conditions turn around, investors suddenly turn to these stocks because they sense a revival of their fortunes. This is exactly what has happened in the current market. After the large cap-led rally, small and mid-size companies started rallying.

Pick Real Winners

"The sentiment-driven rally is over in small and mid-cap stocks. Now, the upside will be based on the financial strength and the future prospects of the company. And these companies may take at least two years to notch up impressive performance. That is why experts like him want investors to have a clear investment plan. Also, they should have the stomach to digest volatility and should have an investment horizon of five years.

Your portfolio should have allocation to small and-mid cap funds because they can be extremely rewarding in the long run. But you should get your allocation right. His model equity portfolio will have 60% large-cap funds and 40% small and midcap funds. Within the 40% allocation to small and mid-cap funds, 70-80% should go to mid cap and the rest to small-cap funds.