10-15% of equity allocation should be in mid- and small-cap segment
I have been investing in two large cap equity funds for the past five years. Should I now discontinue one fund and invest in a mid-cap or small cap fund to diversify?
Ideally, bulk of the equity allocation should be into large-cap equities as they are less risky than midcap and small-cap equities. Though mid-cap and small-cap equities have the potential to deliver much higher returns than large-caps, they are more volatile and involve substantial risk as evidenced by the sharp drawdowns (around 50%) that these segments witnessed from the peaks in January 2018 till March 2020. Allocation to the mid- and small-cap segment can be restricted to 10-15% of the equity allocation.
Large-cap funds do offer some exposure to the mid- and small-cap segment (typically <10%) depending on the fund manager’s views on these segments across time. To enhance your exposure to the mid- and small-cap segment, you can look to gain exposure to flexi-cap funds which tend to invest 70-75% of the equity corpus into the large-cap segment and rest in mid/small cap. Alternatively you could invest in pure play mid and small cap funds, preferably via SIP or STP route. You can also evaluate the sector and style diversification at a portfolio level, and the extent of overlap in the equity funds in your portfolio to assess the true degree of diversification that the portfolio equity funds offer.
I have been investing in a SIP for four years. Though I do not need money now, should I redeem some of it in case the markets go down?
You should continue to stay invested if you have a long investment horizon, and can even look to allocate further when any corrections take place as these present an opportunity to buy units at cheaper prices. Over longer horizons, equities tend to outperform most asset classes.
You can consider re-balancing your asset-allocation back to the target weights in case of any significant drift due to market movement. Withdrawing any corpus would lower your portfolio value to the extent of the amount withdrawn and you might lose out on any subsequent gains on the withdrawn corpus that would have accrued till the end of your investment horizon.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to firstname.lastname@example.org