Your queries | Mutual Funds: Can be slightly underweight in small-cap funds now

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For the long-term, should I invest some money in small cap funds?
— Ayush Mittal

Small-caps have outperformed the mid-cap and large-cap segments by a wide margin since the lows of March 2020. However, in the recent market correction in the YTD period, the small-cap segment (S&P BSE Smallcap Index) is down 10.3%. This reiterates the high risk-high reward proposition that small-caps offer. Be cognizant of the valuations (forward-looking) as they play a crucial role while determining exposure to any asset class /security. Lower (cheaper) valuations reduce the risk of high future capital loss and improve upside potential, and vice-versa. The bulk of the equity allocation in a portfolio should be into large-cap equities (80-85%) as they are less risky than midcap and small-cap equities. Based on current valuations, you can be slightly underweight in the small-cap segment and consider the SIP or STP routes for making investments.

I have been investing in a SIP for seven years. Should I redeem some units in case the fund value drops?
— Rohit Gupta

You should continue to stay invested if you have a long investment horizon, and can even look to allocate further when any corrections take place as these present an opportunity to buy units at cheaper prices. Over longer horizons, equities tend to outperform most asset classes. 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 Withdrawing any corpus would lower your portfolio value to the extent of the amount withdrawn and you might lose out on any subsequent gains on the withdrawn corpus that would have accrued till the end of your investment horizon.

I am planning to invest Rs 20,000 every month via SIP. Should I open four SIP accounts to diversify the portfolio?
— Soumil Modani

You would need to register the SIPs separately for investing into different funds. It is advisable to diversify investments across 2-3 funds to mitigate concentration to a particular asset management company or fund manager’s style/bets.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonalfinance@expressindia.com.

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