Tame your animal spirits

Mid- and small-cap companies, which are beyond the top 100 companies by market value, have grown leaps and bounds recently. In the last 18 months, 12 mid caps have grown to become large caps, while 17 small-cap companies have moved up to the mid-cap tier. Given the context, the growth potential of mid-cap and small-cap funds is undeniable. However, they come with high risk. Mid- and small-cap funds are, at best, meant for an allocation of about 25-30 per cent of your portfolio. Don't treat them as a short-term play or overcommit to this space. Highlights & trends Performance: Mid- and small-cap funds have been on a tear since 2023. Small-cap funds have already achieved 60 per cent and mid-cap funds 70 per cent of last year's returns. Valuation peaks: The 250 small-cap index to Sensex ratio conveys the valuations in the small-cap segment. This ratio has hit a peak not seen since the 2018 mid- and small-cap surge. Rising P/E (price-to-earnings) multiples further highlight this trend. About 40 companies in the 250 small-cap universe now have a P/E ratio of over 100, compared to just four in 2

This article was originally published on September 17, 2024.