Equity portfolio in 2022 should be mix of current and future market leaders
Portfolio with stability of large cap and growth potential of midcaps can help to enhance returns and minimize risk
A car will reach the destination quickly and safely due to powerful engine and shock absorbers – a pump like device ensuring safety by reducing the shocks produced by the rough road surface. Similarly, investment portfolio requires element of large caps which lends stability in the downfall and also capture the growth potential of the midcaps in the rising market. Such portfolio will help to reach the financial goals on time. In addition, if we analyse the domestic economic growth numbers of last few fiscal years along with the major challenges that the economy has faced in the recent times (See chart) it makes sense to invest in both the current market leaders and also future market leaders. With the hopes of economic recovery, many of the young mid cap firms can become large caps going forward and hence it is essential to have both.
India’s economic growth and some of the key disruptions to the economy
Source: MOSPI and financial websites; Note: F indicate the forecast for the fiscal year 2022
Next, let’s look at the returns of the key indices – large cap represented by S&P BSE Sensex and midcap represented by the S&P BSE Midcap index over short and long-term horizon for the period ended December 2021. In last one year, midcaps have performed well compared to large cap whereas five years ago large caps outperformed the midcaps. So, exposure to only one segment would indicate investor missing out the benefit of the other. Hence, prudent strategy is to allocate both large and midcaps
Performance of the indices across different time frames
Source: BSE, Notes: Data for the period ended December 2021 and returns for less than one year is absolute and more than one year is annualized
Investors who excel in stock picking can invest directly into stocks of large and midcap companies. They can decide on the allocation between two market caps based on their risk appetite. Check the fundamentals, business model and management of the company along with assessing the competitive advantage, performance and valuation of the company. Use of the technical analysis can help to evaluate the market sentiment behind price trends and also gauge the volume through charts. Investors can refer to research reports, articles to analyse the stocks. Direct investing into large and midcaps also calls for market timing, rebalance the portfolio and requires higher ticket size to earn more gains.
Many investors who do not ace in the above-mentioned skills can consider investing in large and midcap funds. This category came into existence in 2017 when Securities and Exchange Board of India (SEBI) carried out recategorization of the mutual funds category. As per the mandate, large and midcap funds invest 35% of the large cap and 35% in the midcaps. This will lead to total investment of 70% in the top 250 companies of India. Taking the mutual fund route can offer multiple benefits to investors such as:
- Portfolio managed and rebalanced by the experienced fund manager - Asset allocation decision to large and midcap companies is taken by the experienced fund manager who is backed by strong research team. Once the basic limit is reached, based on the market dynamics the fund manager can decide on the allocation. To capture higher return the fund manager will invest more in midcaps and in event of keeping market volatility in check there might be more allocation of large caps.
- A portfolio mix of the large caps (blue chip companies with established track record and who are the market leaders) and midcaps (emerging businesses) can help to earn better risk adjusted returns. In addition, these funds can be relatively less risky than the pure midcap funds and the presence of the large caps can give the stability in the turbulent times.
- In the volatile times, a small step of regular investing of fixed amount through systematic investing plan (SIP) can help to build large corpus over long term. Anything big starts with something small and hence to attain long term financial goals start investing small amount.
Selection of the best large and midcap funds is based on the evaluation of the quantitative factors such as performance across market phases, portfolio traits, analyse the risk adjusted returns through evaluation of the risk ratios like Standard Deviation, Sharpe ratio over three-year period. Similarly, look at the qualitative factors such as fund manager experience, track record in managing other schemes. Check the key ratios like the expense ratio and portfolio turnover ratio which will help to evaluate how competently the cost is kept under control. Investors who are willing to bear higher risk and stay invested for long term horizon of five years can consider taking exposure to large and midcap funds. With the hopes of better economic prospect and many new age companies coming up, investors can benefit from exposure to large and midcap companies.