Dhirendra Kumar suggests a plan of action for a long-term horizon
I have three funds - one each of large cap, mid cap, and small cap. The small-cap fund makes up about 23.67 per cent of the total value of fund investments. Considering that small-cap funds are very volatile and the market is at its peak, should I trim my allocation in small caps to about 8-10 per cent and keep the redeemed amount in my bank account, considering my investment horizon is for the long term?
If you are unperturbed and not scared by the ups and downs of the market, and if your investment horizon is still more than ten years away for which you are continuing to invest, then I would suggest, let it stay invested. This, as there is one disadvantage of redeeming now for rebalancing.
If you rebalance, you definitely reduce your risk; as the money that has grown significantly in equity, you redeem and invest in fixed income assets where there is the least risk in terms of drawdown. But the disadvantage I talked about is, an asset that has been growing, you reduce, and if it continues to grow, you would have reduced its growth potential. This is known as "Selling your winners." Your attention is focused on small caps because Sensex has risen by about 52 per cent in the last year, but the small-cap index has grown by close to 92 per cent. Your allocation in the small-cap fund would have risen due to this reason. So if you rebalance now, you would be selling your winners.
I believe a lot in the small-cap segment. Most of the small-cap funds have always been able to beat the small-cap index quite handsomely. I am astonished by the performance of large-cap funds over the last two-three years, as they've not been able to do as well as the index when the latter has performed quite well. Also, investors do not have many options to invest in a small-cap index as it is a theoretical index and may not necessarily represent these market segments as well as Sensex and Nifty, due to various reasons.
So I would suggest not going ahead with your plan if you intend to invest for a long horizon. However, if you are going to need the money in the next four-five years, you should definitely start systematically redeeming your investments and move it to fixed income assets.