Mutual Funds: Stretched valuation concerns around small and midcaps - How should you react?

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Also Read: FY24 Market Review: Nifty Midcap and Smallcap surged over 60%; check best-performing stocks Does stretched valuations warrant a total exit from the small and midcap space. There is no straight answer to this as the answers are based on the investment phase the investor is in and based on his/her risk appetite and liquidity requirement.

Before further extrapolating this, it needs to be borne in mind that proper asset allocation needs to be ensured and within the asset class also further diversification needs to be followed so that there is no undue concentration to any. Small and midcap stocks and funds are meant only for those with a high-risk appetite.

If an investor has a longer investment horizon of about five years or more, it is advisable to stay invested and the mid and smallcap stocks would turn around after a consolidation to further compound your returns. The argument of moving completely to largecaps or any other asset class which is performing well deviating from your ideal asset allocation is never a smart move.

This is simply because the purpose of asset allocation is to diversify not just the return generation engine but also to spread the risk. This purpose will be defeated if you become a fair-weather friend on the investment front concentrating on only the performing asset class of the moment and this can badly backfire.