What is the ideal portfolio mix for the small, mid, and large-cap?

Investors need to consider a portfolio mix that addresses their hunger for risk and returns for 2022.

The ongoing Covid-19 pandemic has pushed market volatility to an all-new level, creating ripples of fear among investors with varied appetites for risk. Investments in mutual funds remain lucrative, but new and existing investors have their worries about volatile factors influencing the market. What is the ideal portfolio mix for investors when it comes to small, mid, and large-cap funds? In 2022, there may not be one answer to that question.  

Defining investment strategy 

Evolving times often force investors to rethink their investment strategy, but experts advise against following trends blindly. Yes, it is pertinent to review the portfolio periodically, but you may not want to change everything that you already know about investments. The year 2021 has been a mixed bag so far, with equities outperforming in many ways. Both mid and small-caps did well too, especially in select markets. The absolute return for the Nifty 50 Index is over 20 per cent for 2021, while for Nifty 500, that stands over 25 per cent. Investors would need to balance out their investment portfolio to include different types of small, mid, and large caps, just like they have been doing since the start of the pandemic.  

Keeping a tab on the evolving pandemic and inflation 

The impact of the Omicron variant is not entirely clear as of January 2022. Although Omicron is unlikely to impact the Indian and global economy like the Delta variant in the second wave, the overall predictions are based on many assumptions. Inflation remains a matter of concern too. None of the states have declared a complete lockdown so far, but even partial lockdowns could push the inflation, which could have its impact on the economy and market. In other words, the pandemic could still emerge as a spoiler for many investors, given that there are no clear indicators for now. Decisions related to liquidity also influence the market, especially the global economy at large.

How to decide on the equity mutual fund portfolio mix? 

Investors need to consider a portfolio mix that addresses their hunger for risk and returns, which may sound cliché but remain a valid point to consider. It is expected that equity mutual funds with a strong track record will continue to perform well. Investors also need to consider fund management in-depth and review if the existing funds are being allocated as per the objectives stated. Growth and value are two traditional aspects for selecting caps, but fund houses will remain a key aspect too. Experts agree that equity mutual funds that are being managed by experienced managers are more likely to follow the objectives and have a defined system for investments. As far as fund managers are concerned, it is wise to stick to one equity mutual fund from one manager, which should be the same for fund houses too. 

Multi-cap funds vs Flexi-cap funds 

For the uninitiated, multi-cap funds are equity funds that are invested in various companies with diverse market capitalizations. The investments are done in a way to achieve the set investment goals and maximize growth while addressing the risks. Flexi-cap Funds, on the other hand, are dynamic and include investments across large-cap, mid-cap, and small-cap stocks. Unlike standard mid-cap/small-cap funds that invest in stocks based on market capitalization; Flexi-cap funds do not focus on that but instead create a more diversified series of investments. Flexi-cap funds offer more flexibility to AMCs as there is no binding rule on how the funds are invested, as in the case of multi-cap funds.  

Which one is better for your portfolio? Again, it comes to your investment goals, but if you seek long-term gains from equity and derivatives, Flexi-Cap Mutual Fund may work better.  

Determining the approach for mid-cap and small-cap funds 

There’s no denying that mid-cap and small-cap stocks surpassed all expectations in 2021 and outperformed large-cap funds by a margin. It is important to point out that mid-cap and small-cap funds promise high returns for very high risk. Experts believe that these caps may continue to perform well, although there is no way to predict the equity markets, which tend to be cyclical.  

What’s the ideal portfolio mix? 

If you have a risk appetite and have been investing systematically in mid-cap and small-cap funds, you may want to continue doing so in 2022. However, it remains equally important to diversify the portfolio with large-cap funds in the mix. These large-caps perform well and add that element of stability to any portfolio. For mid-cap and small-cap funds, patience is the key. If you are willing to wait for five to seven years, most of your well-selected options will click. You can expect to grow and gain with large-cap funds while keeping the risks on the lower side.  

If needed, don’t shy away from talking to an investment advisor.  

Author, Rachit Chawla is CEO & Founder, Finway FSC