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What percentage of my portfolio should be in small cap funds for a 15-year period?

Dhirendra Kumar says how much risk investors can take in terms of small & mid-cap funds. He also mentions a few rules

Transcript: It should not be a substantial part. It depends on how long you have been an equity investor (either through mutual funds or directly); whether you understand the way equity functions & your ability to absorb the volatility of the market; willingness to stick to a plan.

In that case, about 30-40% of your portfolio in small & mid-cap fund is good. You should follow the following three rules for your small & mid cap investment:

  1. You should only invest in SIP and not in lump sum (that is valid for all equity investments).
  2. You have to invest for a full market cycle. A lot of investors are getting attracted to small and mid cap funds as they have performed well in the past 2-3 years and particularly in the last 1 year. If you look at the numbers and different components of markets over the past 25 years, whenever it gets easy to invest in any fund category it might not be the appropriate time to invest in those funds. Like in the case of 2008, the infrastructure fund investment had become easy and the fund was on an upward trend. A similar thing happened to technology funds in 2001. However, a lot of investors lost their money due to a market correction then. When it gets easy to invest, it becomes hard to make money. Going by this principle, at present, the small cap is looking very confident and there might an unpleasant surprise which is why not more than 30-40% of the portfolio should be in small & mid cap funds.
  3. Small & mid cap funds need a close watch. Unlike the multi-cap/large cap/balanced fund, here the fund manager does not have a great flexibility. Each small cap is different from the other and unique. Be prepared to change the fund if it is not meeting the expectation. You also need to keep an eye on fund manager changes as it may make the returns more uncertain.
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