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What should be the allocation to small caps in the portfolio of a 50-year-old?

Dhirendra Kumar explains the factors to consider while investing in small caps

I am 50 years old and a small-cap investor. What should be the allocation between small caps and fixed income in the current scenario?
- SK Sharma

If you're 50 years old, you're fine with investing in small caps, and you think that you can withstand the significant declines of small caps, then investing in them is fine. Because though small caps are very rewarding, they turn out to be highly disappointing in the short run. Sometimes when they fall, they can do so in quick time, so much so that they scare the hell out of everyone.

So I think one should have some kind of fixed income allocation, maybe 20-25 per cent. I don't think there's any magic formula or a thumb rule for that. It should primarily help you book gains from your small caps if everything goes haywire, which can happen every once in a while.

Either it goes dramatically up or down, and that is when your asset allocation changes radically. In the case of the former, your money into equity which was, let's say, 75 per cent will sometimes become more than 90 per cent, simply because it has gone up so dramatically, and that is the time when you should be able to pull back and realise a part of your gain. If small-cap allocation goes down, you should have the money in fixed income to be moved to equity.

So have that allocation to fixed income of some scale, but anything less than 20-25 per cent will not be meaningful. If it is just 10 per cent, you will keep rebalancing frequently and will not give an opportunity to run.

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