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Is a crash expected due to large caps being overbought?

Dhirendra Kumar explains why investors should not think of the current situation as large caps being overbought and what approach they should take

With large-cap funds gaining traction from investors, do you see a crash in the near term because of the overbought position? How should I balance my portfolio in this situation?
- Sachin Parikh

Please don't make all these assumptions about large caps, as things have substantially changed. Firstly, large companies in lean times tend to become bigger. Secondly, huge cash flow is coming to these companies, as indexing has become popular. In fact, the largest equity fund in this country is also an ETF. Five years ago, indexing was not at all popular, but today Nifty ETFs manage assets over Rs 1 lakh crore. And this is likely to continue as Employee Provident Fund Organization (EPFO) has started investing in these funds. EPFO, till date, has invested over Rs 75,000 crore (approximately) in these Nifty ETFs and will keep investing more amount every month, as it keeps receiving funds from employees whose PF is deducted from their respective companies. Hence, don't consider it as large caps being overbought, rather this is the long-term money that is coming to large caps through index funds and ETFs. And since more money will keep flowing in, don't bet against the market.

Similarly, small- and mid-cap companies have their own promise and they can also gain traction in the future. In fact, several funds are now being launched in these categories and once they start doing well, achieve the threshold scale and demonstrate their ability to perform, more people will invest in them. So, don't make any such assumption that any particular category of funds is being overbought.

Make sure that you keep investing. If you can't decide which fund is better, go for index funds. If you are able to choose a good fund, invest in it. You can also take the help of our Best Funds recommendation or subscribe to our Premium services, which will be available in a few weeks, to choose a good fund in a category. If you want to invest in stocks, you can use our Stock Advisor service or any other resources to build a good equity portfolio for the long term. Irrespective of all these, it is important to keep investing. If you invest regularly, you will not regret in the future of any missed opportunity. Meanwhile, you will go wrong with a couple of your investments or you may enter the market at a high, but in the long run, this doesn't matter.