I have been investing in two large cap equity funds for the past five years. Should I now discontinue one fund and invest in a mid-cap or small cap fund to diversify?
-Atul Kumar Mahajan
Investors should follow an asset allocation-based approach (mix of equity and debt). Higher the investment horizon and risk appetite, higher can be the allocation to riskier asset classes such as equity. The bulk of the equity allocation should be into large-cap equities as they are less risky than mid-cap and small-cap equities. Allocation to the mid- and small-cap segment can be restricted to 10-15% of the equity allocation.
Large-cap funds do offer some exposure to the mid- and small-cap segment (typically <10%) depending on the fund manager’s views on these segments across time. To enhance your exposure to the mid- and small-cap segment, you can look to gain exposure to a flexi-cap fund. Such funds tend to invest the bulk of the equity corpus into the large-cap segment (~70-75%) and rest into the midcap and small-cap segments. Alternatively you can invest in pure play mid and small cap funds, preferably via SIP or STP, given that these segments have appreciated considerably over the past 1 year.
I have been investing via SIP for four years. Though I do not need any money now, should I redeem some of the gains?
Equities are more volatile than most asset classes with even the possibility of a capital loss over the short-term. However, as the holding period increases, the risk of capital loss diminishes. You should continue to stay invested if you have a long investment horizon, and can even allocate further when any corrections take place. Investors should stick to their long-term strategic asset-allocation which in turn depends on their risk appetite (ability and willingness to take risk) and not try and time the markets. You can consider re-balancing your asset-allocation back to the target weights in case of any significant drift due to market movement. Withdrawing any corpus would lower your portfolio value to the extent of the amount withdrawn and you might lose out on any subsequent gains on the withdrawn corpus that would have accrued till the end of your investment horizon.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to firstname.lastname@example.org