Kaustubh Belapurkar, Director of Fund Research at Morningstar Investment Adviser, spoke on CNBC-TV18 about the importance of mid- and small-cap funds in a portfolio. Prior to that, he also discussed the positioning of large-cap funds in a portfolio.
Below are extracts from both those conversations.
Why investors must look at large-cap funds.
A large-cap fund is what we call the core portion of an equity investor's portfolio. These funds have a lower risk as compared to a small- or mid-cap fund and a sector fund.
So any investor who needs to be investing in the equity space should allocate a large portion into a large-cap fund. For a first-time equity investor, this would probably be the easiest fashion to dabble in - through a large-cap fund where he would see low volatility as compared to any of the equity funds.
However, we are talking about specific funds. Morning Star does a lot of intensive research in understanding the processes that go behind building these portfolios.
(You can read about the three large-cap recommended funds here.)
Coming to mid- and small-cap funds..
If you look at the way the industries themselves have moved versus the large-cap category, you have had anywhere between 20% and 22% in the mid- and the small-cap index on the BSE.
However, what is crucial to understand is the fund because the dispersion of returns on the mid- and the small-cap side is so huge, the good active fund managers can deliver significant alpha over the benchmark. That is where lot of these good fund managers have outperformed the index by 10-15% on a consistent basis over the last three-five years and that is where investor should be looking at.
(You can read about the two mid- and small-cap recommended funds here.)
These funds are more volatile than your large caps but if you are looking at long-term wealth creation, this should certainly be a part of your portfolio.
The way I would see it is that large caps are a crucial holding of any investor's portfolio. Mid caps are what you would call the real growth engine to an investor's portfolio. Depending on the risk profile, you should look at what allocations you should make to the mid-cap space.
Yes, they have delivered significant returns over the last three-five years compared to large-cap funds but you have to be wary that they are more volatile. So you clearly need to have a long-term horizon in terms of investing in some of these funds.
So, I will say even 5-7 years might be a short time because you can have cycles in the market where mid caps might underperform and since they have run up so much, you have to be a little cautious when entering this segment.
