Large-cap stocks tend to be more stable in the long-run, which ensures that the overall portfolio of investors becomes better balanced.
As mid and small-cap stocks have logged steep gains in the past one year and valuations are turning less attractive relative to large-caps, investors should now look at incremental allocation to large-cap funds. By investing in large-cap funds, investors can diversify their portfolio to protect their investments in case of correction in mid- and small-cap stocks.
Large-cap stocks tend to be more stable in the long-run, which ensures that the overall portfolio of investors becomes better balanced. Also, as investors increase their investment horizon the power of compounding comes into play for creation of substantial wealth. Experts say investors can expect favourable returns from large-cap companies due to their substantial market capitalisation, which makes them resilient during economic downturns.
Alekh Yadav, head, Investment Products, Sanctum Wealth, says earnings growth momentum for mid and small-caps is moderating. “Our internal asset allocation model is indicating underweight on mid/small-caps and overweight on large-cap stocks. In our model portfolio we have reduced weight to mid-caps and have moved that money to large-caps. We suggest investors should look to overweight their large-cap allocations.”
Similarly, Soumya Sarkar, co-founder, Wealth Redefine, says large-cap stocks are comparatively more affordable and can potentially offer better returns in the future. “When mid- and small-cap stocks experience substantial increases in value, they tend to become more expensive. Investing in an expensive asset class can limit potential gains, as you are entering at a high point,” he says.
Go for SIPs in large-cap funds
Large-cap valuations remain attractive and investing in large-cap stocks through a systematic investment plan (SIP) for a three to five-year horizon would be a wise strategy now. First-time equity investors should start with large-cap funds through SIP to build confidence. Once they become comfortable in the market and understand market behaviour and other aspects of investing, they can diversify into mid- and small-cap investments.
Even if first-time investors choose to invest in mid- and small-cap funds through SIP, Sarkar recommends allocating a larger portion of funds to large-cap investments initially. “As their knowledge and comfort with the market grows, along with their understanding of mutual funds and investment strategies, they can gradually increase their allocation to mid- and small-cap investments,” he says.
Nehal Mota, co-founder and CEO, Finnovate, says while a balanced portfolio approach would surely be the right approach, the difference in returns is quite large and once a large-cap fund is held for a period of six to eight years, the probability of negative returns comes down significantly. “Irrespective of whether we look at one-year, three-year or five-year returns, the mid-caps and small-caps have certainly done better than the large-caps. However, it is true that while longer term returns are still higher for the small and mid-caps, the gap is much lower as compared to one-year returns,” she says.
Passive or active?
Large-cap funds have seen outflows in recent months as investors are actively seeking alpha in small-cap and mid-cap funds. One of the key reasons for weakness in the large-cap space is the emergence of passive funds like index funds and index ETFs, which mirror the Nifty or Sensex and do so at a much lower cost. Any incremental allocation to large-caps must be assessed keeping in mind the investor’s goals, costs, exit load and taxes.
Going ahead, Nehal says it would be tougher to earn alpha in large-cap funds, compared to mid-cap and small-cap funds. “One option is to prefer a multi-cap fund or flexi cap fund. These categories of funds automatically combine small-, mid- and large-cap stocks and have performed better than large-caps on CAGR returns,” he says.
If investors are putting in fresh capital, staggering the allocations make more sense than lump sum now as volatility can continue for some more months. Divam Sharma, founder and fund manager, Green Portfolio, a portfolio management services, says diversifying of the large-cap fund across sectors is key. “If the diversification is not skewed, it would give a more consistent return in a large-cap fund,” he says.
Reference Link:- https://www.financialexpress.com/money/making-the-most-of-market-volatility-stagger-investments-in-large-caps-3305532/