Investors should adopt an asset allocation approach towards equities, with exposures across all categories.
Given the current market backdrop, investing needs to be done judiciously. Investors participating in equity markets are advised to adopt cautious approach during these challenging environment. Equity trend amid high volatility around mid-cap funds while large-cap, on the other hand, can be considered as less risky. However, the past trends show only slight variance between the returns generated by large-caps over mid-cap. Hence, a million dollar question arises – which equity savings category can be considered as less risk and provide high returns future earnings for investors? However, one cannot select a specific category of funds that offer exposure to equities while minimizing the risk element, but doing proper asset allocation can help them to do so.
Investors in the current market conditions can consider equity investments whether be it a large-cap or a mid-cap that aims to generate income by investing in bluechip companies or emerging companies to get higher returns. However, while looking at capital appreciation through moderate exposure in equity, one can also go for hybrid equity funds option too.
The equity saving funds endeavours to wrap three benefits together – income opportunity, the growth potential of equity and tax efficiency.
“2017 was a fantastic year for Indian equities, particularly mid and small cap equities. Sensex delivered 27.5% in 2017, against 46% for BSE Midcap, and 58% for BSE Small Cap. The current trend of outperformance of mid and small caps over large caps has been continuing since 2013. One flip side of this trend is that we are seeing many investors falling into the behavioural trap of believing that this outperformance trend will continue forever, and they are allocating their money exclusively to mid and small caps. Looking at history, we can safely say that there is no indication that mid and small caps will always outperform large caps in the long run. In fact, since 2003 over seven-year investing periods, we see that mid and small caps outperform large caps in less than half of the observed cases,” told Himanshu Kohli, Co-Founder, Client Associates to Moneycontrol.
In normalcy, the companies stocks with a market cap of Rs 20000 crore or more comes under the ambit of large-cap stocks.
Large caps and mid and small caps vary slightly in their attributes. In the large caps, since these are larger firms there is a relatively higher degree of revenue and profit certainty.
“Large caps are less volatile than mid and small caps. Mid and small cap firms can offer elongated periods of high growth, but to access this high growth, these firms also take an inordinate amount of operational risks. In many cases, these operational risks do not pay off, and earnings suffer. With high earnings fluctuations, we also observe more volatile valuations and stock prices,” said Himanshu.
In normalcy, the companies stock with a market cap of Rs 5000 to Rs 20000 crore comes under the ambit of mid-cap stocks. and the companies stocks with a market cap of Rs 1000 to Rs 5000 crore comes under the ambit of small-cap stocks.
Himanshu said that one of the benefits of midcaps stocks is that these firms are typically under-researched, and there is some alpha to be discovered from the quality stock selection. With SEBI’s reclassification mandate where fund managers will have to build the majority of their mid-cap exposure from a universe of 150 stocks, this stock selection alpha may get slightly constrained.“Looking at these reasons, we suggest investors adopt an asset allocation approach towards equities, with exposures across all capitalizations. Given the attractive relative valuations between large caps to mid and small caps, we prefer slightly overweight large caps at this stage relative to mid and small caps,” he added.