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The Goldilocks problem

Should fund investors try to pick and choose which parts of the market will do well?

I have observed that in the last ten years, large-cap funds have given returns at 19.61 per cent, equity diversified funds at 20.33 per cent and mid-cap funds have given 21.24 per cent. I don't see a big difference in their performance. If investing for next 10 years, should one be more inclined with large-caps, equity diversified, mid-caps or a blend of the three?

Point-to-point returns can vary widely depending on the end-point and such numbers can look very different depending on when you are calculating them. For example, take a look at the following table, which shows seven-year returns of Large, Mid and Small Cap companies at different points of time. We've taken seven-year returns because Midcap and Smallcap indices are available only from 2003 onwards.

The obvious conclusion is that at different times, different types of stocks can do well. It doesn't make sense for fund investors to try and guess what will happen. The best policy is to choose Large & Midcap or Multicap funds and then let the fund manager do his job in terms of figuring out which parts of the markets will do well and which won't.

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