Balance is the essence of life and also a successful investment strategy. Your investment should be diversified with a mix of high-, medium-, and low-risk stocks. Each category offers unique risk-reward ratios, and a strategic blend can mitigate volatility while maximizing returns. Here’s how an investment approach covering multiple market caps can bolster portfolio resilience in FY 24-25.
Understanding Market Capitalisation
Market capitalization represents the total market value of a publicly traded company’s outstanding shares. Stocks are categorized into three primary segments based on their risks and capitalizations:
- Large-Cap Stocks: These are stocks of established companies with a market cap of over ₹ 20,000 crore.
- Mid-Cap Stocks: Mid-Cap Stocks: The market capitalization of these companies is small, ranging from ₹5,000 to ₹20,000 crore.
- Small-Cap Stocks: These stocks belong to smaller companies with market caps below ₹5,000 crore.
Benefits of a Balanced Approach
A balanced approach to investing in different market caps offers several advantages such as:
Reduced Volatility
Investing across different market caps reduces portfolio risk. Large-cap stocks offer stability during market downturns, mid-caps add moderate growth potential, whereas small-caps provide high-return opportunities during bull markets. Over the past decade, portfolios combining these three categories have experienced lower volatility than those focused solely on one category.
Opportunity for High Returns
While large-cap funds provide consistent returns, mid- and small-cap companies provide greater growth potential. In FY24, select mid-cap mutual funds and small-cap investments generated 20-30% returns, far surpassing the Nifty 50 Index. This showcases the compounding benefits of smaller stocks that capture growth in emerging sectors.
Enhanced Portfolio Diversification
Diversification reduces exposure to market cycles that may impact individual categories differently. For instance, large-cap stocks like those in the Nifty 50 tend to perform well in economic downturns, while small-cap stocks may excel during periods of growth.
Sectoral Opportunities in Different Market Caps
Different market caps provide various opportunities, covering every kind of industry you should be investing in. Let’s look at some of these.
- Large-Cap: Companies in the IT and banking sectors continue to lead the large-cap category. For instance, TCS and Infosys have delivered stable returns as demand for digital services remains robust.Large-cap stocks in FMCG and pharmaceuticals also offer resilience, with a projected 9.6% CAGR through FY25, supported by domestic consumption and healthcare demands.
- Mid-Cap: Mid-cap stocks in renewable energy and consumer goods are expected to perform well due to rising demand. Mid-cap companies like Motilal Oswal and WhiteOak Capital have delivered impressive returns of 49.84% and 30.69% respectively in FY24.
- Small-Cap: Though volatile, this segment includes emerging players in niche markets like specialty chemicals and green energy, areas that are anticipated to experience significant growth.
You can also invest via flexi cap funds. They are mutual funds that can invest in large, mid, and small-cap stocks without following strict allocation guidelines.
Unlike multi-cap funds, which must invest a certain percentage in each market cap, flexi-cap funds allow fund managers to change allocations as needed. This adaptability enhances resilience in changing market cycles, making funds like Parag Parikh Mutual Funds a valuable addition for investors seeking a balanced approach.
How to Build a Balanced Portfolio?
Financial advisors suggest the following allocation to achieve balanced growth with managed risk:
- 50% in Large-Cap Funds: Offering stability and steady returns, this allocation anchors the portfolio and safeguards against market volatility.
- 30% in Mid-Cap Funds: Adding exposure to growth-oriented companies, this allocation can boost portfolio performance during economic expansions.
- 20% in Small-Cap Funds: Providing high growth potential, this portion capitalizes on niche markets and emerging sectors.
These allocations should be reviewed annually or biannually to align with changing market conditions and financial goals.
Conclusion
A balanced investment strategy across large, mid, and small caps combines stability, growth potential, and high-return opportunities, essential in today’s evolving markets. By leveraging the unique characteristics of each market cap category, investors can craft a diversified portfolio that optimizes returns and minimizes risk. Investing through mid-cap mutual funds and other market cap-specific funds—guided by tools like SIP calculators—can further enhance wealth creation while staying aligned with individual risk tolerance.
