Should I redeem my investment from a small-cap fund now because the market has risen too much?
- Birendra Sharma
Many equity market outlooks that AMCs have been coming out with expect small caps to outperform the large caps from a medium to long-term horizon. But I'd say that should not guide you. The role of small-cap funds in a portfolio is that of a supplementary allocation of not more than 10-15 per cent to boost returns. If you look at the long-term track record of small-cap funds over longer time frames of eight to ten years or more, they tend to outperform the flexi-cap or the large-cap funds by a fair margin, and they do that consistently. So from that perspective, they are a good way to bump up your equity portfolio returns.
But having said that, they are riskier and much more volatile. That's why it is not desirable to go overboard on those allocations and keep them fairly limited in a supplementary role of 10-15 per cent in your portfolio. So I think you should be guided by that framework and evaluate your portfolio. If you have a much higher allocation to small-cap funds or your investment horizon is much lesser than even eight to ten years, you should consider pruning your exposure to these funds.