As Sensex hits all-time high, should investors reallocate money to mid-cap stocks?

Mumbai: Investors could lock in a portion of their profits in large cap funds and reallocate the proceeds to a mix of mid and small cap funds, said financial advisors. With the Sensex and Nifty at all-time highs, mid- and small-cap shares appear better poised to outperform. “Investors skipped allocation to mid and small cap funds, as they were fearful of slow economic growth during the pandemic. However with large cap valuations at a peak, they could consider booking some profits and allocating 15-20% to this segment now,” said Amol Joshi, Founder, Plan Rupee. He recommends Motilal Midcap 30 and ICICI Prudential Small Cap Fund. After the onset of Covid-19, investors rushed to safety as they believed large companies would be better positioned to gain market share and cut costs. Many believed the economic slowdown would continue for a longer time and many mid and small cap companies would find it difficult to protect margins..The risk appetite of investors however have improved with economic activity picking up and Pfizer announcing that a coronavirus vaccine is in the offing. While large cap stocks have seen a sharp upmove, fund managers believe there is value in mid-cap stocks Over the last three years, while the Nifty 50 has gained 23% on an absolute basis, the Nifty Midcap 100 is down 8.3%, while the Nifty Small cap 100 is down 31%. After the sharp underperformance in the last three years, many fund managers believe mid and small cap stocks with strong fundamentals could play catch up.“There are 200 companies which are category leaders in the industry that they operate in of companies with market capitalization rank between 101 to 650,” says Pankaj Tibrewal, senior fund manager, Kotak Mutual Fund. Tibrewal, who who manages Kotak’s mid and small cap fund, said the second quarter results have surprised investors as many companies have improved profit margins. “Small and midcap companies are focusing on shortening the working capital cycle and reducing debt,” he said. Many companies in the mid and small cap space across various sectors like tiles, plywood, agrochemicals, auto ancillaries, speciality chemicals consumer durables and IT are strongly positioned to increase market share.Financial planners believe investors should not allocate more than 15-20% of their portfolio to mid- and small-cap fiunds and would be better off staggering this over the next three months.“A second wave of Covid 19 could delay any economic recovery and cannot be ruled out at this juncture, which could hurt smaller companies higher. Since high volatility is expected investors would be better off staggering their investments,” says Anup Bhaiya, MD and CEO, Money Honey Financial Services. He recommends Kotak Small Cap and Mirae Asset Midcap Fund.
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