Assess your investments: Follow simple asset allocation for large, mid & smallcap stocks

economictimes.indiatimes.com:

Given the age profile of Indians and the low exposure to equities in their savings pool, this trend is likely to continue in the future. The pandemic did not dampen this appetite and since January of this year, the inflows into mutual funds continued at a good pace, with small-cap funds receiving record inflows while the large-cap had a mild outflow (See table below). Smallcap funds must invest at least 65% in smallcap companies; defined as those companies which are ranked 251 and beyond by market cap.

The large and mid-sized companies comprise the first 250 companies. Investing in smallcaps has paid off well since 2020 and even year to date (January to June) as can be seen by the returns it has generated (See table below) The advantage of investing in smallcaps is that the returns can be handsome. It is however important to know that the returns can turn negative very quickly in the case of small companies.

It has the potential to earn returns but is also risky. Unless one is very nimble, one can end up being hurt by the investments particularly if large investments have been allocated to this strategy. One cannot perfectly predict the movements of stocks or the market cap segments that are likely to do well and thus to be nimble all the time.

While smallcaps tend to do well in short periods in the long run it is the larger companies that have done better (See the graph below). In order to benefit from a small cap, it is important to allocate to this strategy. However, it is also important to do proper asset allocation between large, mid and smallcap where a larger proportion of equity assets is held in large cap and a small portion in small cap.