With queries ranging from the optimal distribution between small-cap and mid-cap funds to the near-term outlook on these segments, the quest for sound investment advice becomes paramount.
ET Mutual Funds spoke to Girirajan Murugan, CEO, FundsIndia to get a perspective on the outlook for small & midcap funds as well as making a lump sum payment of Rs 10 Lakh.
Query 1: Crafting a Diversified Portfolio
Rohit Anand: I want to invest Rs 10 lakh lumpsum in mutual funds for the next 20 years. My risk profile is aggressive.I would like to know which funds I should invest in. Should I invest all in small-cap funds or should I divide my investment in small-cap and midcap funds? What should be the percentage of small, midcap & large-cap funds.
Girirajan Murugan: Rohit’s inquiry reflects a common dilemma faced by many investors – should they concentrate solely on small-cap funds or diversify across different market capitalizations?
Our recommendation advocates for a diversified approach, emphasizing exposure to various investment styles, market sizes, and geographic regions.
We would suggest diversifying your equity portfolio across different investment styles, market capitalisation and geographies. You can start with an 80% exposure to Indian equities and 20% exposure to global equities.
The Indian equity portion is split equally across 5 different investment approaches – quality, value, growth, mid & small and momentum.
For global, you can prefer funds that provide exposure to US passive indices such as S&P 500 or Nasdaq 100.
Query 2: Navigating Small & Mid-Cap Dynamics
Rohit Anand: What is your outlook on the small & midcap funds in the near term?
Girirajan Murugan: We evaluate the small-cap segment using our 6-lens framework – 1) Long Term Price Cycle 2) Short Term Price Cycle 3) Valuations 4) Flows & Sentiment 5) Earnings Growth Cycle 6) Past Returns.
We believe we are not in a small cap bubble (read as low chances of a large >50% fall) as the earnings cycle and short-term lens are still flashing ‘green’.
However, the odds of a regular 20-30% fall has increased given that the remaining 4 out of the 6 lenses are in the red zone.
Given these market dynamics, prudent portfolio adjustments are advisable:
Existing Small Cap Allocation:
Restrict exposure to less than 20% of the overall equity portfolio, ensuring periodic rebalancing to maintain optimal allocation levels.
SIP Continuation:
Continue Systematic Investment Plans (SIPs) only if the investment horizon exceeds seven years, aligning with the long-term growth trajectory.
New One-Time Investments:
Exercise caution against incremental allocations into small-cap funds amid the current market juncture, prioritizing a vigilant approach towards capital deployment.
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