Small-cap indices have significantly outperformed large caps over the past year, leaving investors to decide whether to continue their systematic investment plans (SIPs) or redirect fresh investments towards large-cap funds.
While historical data suggests that periods of sharp small-cap outperformance can be followed by mean reversion, experts say investors should not change their investment strategy solely because of recent market movements.
The more important question for SIP investors is whether their portfolios have drifted from their intended asset allocation. Strong returns can increase the share of small- and mid-cap funds in a portfolio, making rebalancing necessary even if investors have not changed their monthly investments.
Vaibhav Porwal, co-founder of Dezerv, said investors should first assess their overall asset allocation rather than make decisions based on the performance of a particular market segment. The target mix across large-, mid- and small-cap funds, gold, debt and global equities should reflect their financial goals and risk appetite, he said.
Continue SIPs, but check whether your portfolio has become overweight in small caps
Bharath Rathore, executive director at Anand Rathi Wealth, advised investors to continue their SIPs according to their strategy. He said investors should not make allocation changes based only on market movements or valuation figures.
According to Rathore, midcaps were trading around 20% below their estimated fair value, while small caps were about 18% below it. The Nifty 50 was trading 16% below its estimated fair value, he said. These estimates suggest that the valuation argument is not limited to one market-cap segment.
Investors should instead assess whether their existing allocation remains aligned with their financial plan. Rathore said that if mid- and small-cap allocation is around 25% of the overall portfolio, there is no need to change course simply because of recent market performance.
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