Your Queries – Mutual Funds: Keep bulk of equity allocation in large-cap mutual funds |GROWMUDRA

Your Queries – Mutual Funds: Keep bulk of equity allocation in large-cap mutual funds

13 Apr , 2022 By : monika singh

I am investing in flexi-cap funds for the past six months and have lowered my exposure to small-cap and mid-cap funds. Is it the right decision?
— Pradeed Gauba

Flexi-cap funds can invest across market-cap (large/mid/small-cap stocks) based on the view of the fund manager concerned on evolving market situations. Valuations play a crucial role while determining exposure to any asset class /security. Lower valuations reduce the risk of high future capital loss and improve upside potential, and vice-versa.

With the recent correction in markets and strong earnings by corporates, valuations have seen some moderation. Focus on the look-through allocation across market-cap segments in their portfolio. 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 which are more volatile and involve higher risk relative to large-caps. Based on current valuations, one can be slightly overweight the large-cap segment and underweight the mid-and small-cap segment vis-à-vis target allocations. Consider allocation to international equities (~10-20% of your equity allocation) for diversification across geographies with exposure to diverse growth drivers, and also offer a hedge against the depreciation of the rupee.

Is it a better idea to invest a small amount of money in multiple funds?
— TS Mani

Mutual funds tend to hold diversified underlying portfolios, typically 40-50 stocks for equity funds and 30-40 securities for debt funds. Hence the objective of holding a diversified portfolio of mutual funds should be to avoid concentration at asset class, fund manager and investment strategy levels. For small investments, one can consider investing in hybrid funds like monthly income plans, balanced funds, asset allocation funds, etc., which provide varying exposure to equity, debt and gold, thereby reducing the need to hold multiple funds across asset classes. Thus, for smaller investments, one can hold four to six funds in a portfolio.