Fund managers and advisors have been cautioning investors against short-to-medium term investment in mid and small cap funds as valuations surge amid a record run in equity markets.
"If anybody is investing in mid and small cap funds now, he/she should ideally be looking at a longer term perspective because what has happened in the previous one year is unlikely to get repeated in the next one year," said Harsha Upadhyaya, CIO-Equity, Kotak Mahindra MF.
"We are cautioning investors against aggressive lumpsum investments in small and mid-cap focused funds," he added.
Equity markets have been on a rise since hitting multi-year lows in March 2020. As a result, the valuations across market segments have soared to uncomfortable levels. Mid and small cap stocks have led the bull run with massive rise in valuations. As against Nifty 50's 50% gain in the last one year, Nifty Smallcap 250 has risen 105% and Nifty Midcap 150 is up 79%.
Fund managers said that the rally has skewed investor portfolios towards equities and hence it's time to rebalance portfolios. "Now it is very important to rebalance. Investors can sell a part of equity holdings and invest in debt to reset asset allocation target," said Mahesh Patil, Co-Head Equity, ABSL MF.
He however, cautioned against going underweight on equities, saying that equity-oriented funds can still offer 8-10% return in the long term.
MFDs and RIAs are passing on a similar message to clients on equity funds.
"Investors should stick to their strategic allocation. If investors are overweight on equities, we are suggesting them to reduce equity exposure. If they are underweight, we are asking them to continue to invest in equities. We are also asking them to ensure that their portfolios are well diversified across geographies," said Vishal Dhawan, founder, Plan Ahead Wealth Advisors.
"If they already have investment in equities, we are telling them to invest in debt. For new investors, we are suggesting 20% investment in equity funds and the rest in debt," said Vinod Jain, founder, Jain Privy Client.
CEO of Sapient Wealth Amit Bivalkar said he is still positive on equities. "There's liquidity in the market and interest rates remain at a very low level. We feel that markets will continue the upward movement," he said.
