Allocate 30-40% of portfolio to small & midcaps for wealth generation; Here's how

For aggressive investors, ideal equity portfolio allocation should be somewhere in the range of 30-40 percent with respect to small & midcaps.

If I tell you select midcaps still offer good value at current levels, would you believe it? Well, the way mid and smallcaps collapsed in 2018, chances are bleak that anyone would want to invest in the broader market.

Yes, it is true that retail investor portfolios are bleeding as most of them went overweight in small and midcaps last year after witnessing a strong rally in 2017 when the Smallcap index rose about 60 percent and saw more than 160 stocks that more than doubled investor wealth.

But, after steep correction in 2018 – when the S&P BSE Midcap index fell 13 percent and the S&P BSE Smallcap index dropped 23 percent — valuations have become slightly attractive as compared to the beginning of 2018.

Even the thematic mutual funds fell sharply from what they were quoting at the beginning of 2018.

For aggressive investors, ideal equity portfolio allocation should be somewhere in the range of 30-40 percent with respect to small & midcaps, suggest experts.

With a longer time horizon, all these temporary tsunamis-like gyrations appear to be small ripples. I don't feel perturbed by the volatility. We have a firm conviction that they will give good returns in the long run.

Briefly, the carnage in mid and small-cap stocks was caused by mutual fund selling owing to the new categorization of MF schemes, GSM/ASM circular of SEBI, changes in equity taxation, governance issues, recent IL&FS crisis, etc. The LTCG tax also impacted the investor sentiment.

So, should one invest in mid or smallcaps in 2019? Well, the answer lies in one's risk-taking ability, and stock selection remain the key.

IIFL, in a note, said that investors in 2019 should focus on sustainability of earnings growth than the percentage of growth while investing in the current round of market uncertainty.

As small and midcaps are down by more than 30%, one can start to bottom fish in good quality companies but avoid averaging stocks whose fundamentals have deteriorated significantly,

So what is the right portfolio composition for you this year? Most investors who were overweight in 2018, as well as 2017, have already reduced their exposure.

But, if you are an aggressive investor, IIFL said you could allocate 32 percent towards smallcaps, 40 percent in midcaps, and 28 percent towards largecaps, this is in accordance to their model portfolio in December.

 

 

Since small and midcaps are down with double-digit losses in 2018 there is an opportunity to find good quality stocks at attractive valuations in these segments but avoid averaging stocks whose fundamentals have deteriorated significantly, suggest experts.

We are focused on stories, which are benefiting from crude price fall. Also, we are seeing some improvement on liquidity side for NBFCs which will help in a rebound in credit growth which will aid growth to these companies.

At any given time, one should invest based on their risk profile. There is no hard and fast rule; an aggressive person can invest 70 percent in equities, 20 percent debt, and 10 percent in gold, whereas a person with a moderate risk appetite can invest 50 percent in equities, 35 percent in debt, and 15 percent in gold.

He further added that from a tactical allocation perspective, one can increase weight in equities with a bias towards smaller and mid-cap companies.

B Gopkumar, ED & CEO, Reliance Securities told Moneycontrol that investors should allocate 60 percent towards largecaps, 40 percent in midcap and smallcap for a risk-neutral investor with no immediate cash requirements is advisable.

  

MORE WILL UPDATE SOON!!