To be honest, it really depends on what kind of investor you are and what your goals look like. Small and mid-cap stocks have been doing incredibly well lately. For instance, Nifty small caps shot up by 40% in 2023, which is way higher than Nifty Midcap’s 38% and Nifty 50’s 12%. On the other hand, large-caps like Sensex have barely moved, even dropping slightly by 0.12%. This makes small and mid-caps look tempting, but don’t forget—they’re also riskier.
Small-cap stocks have shown impressive growth recently, with the Nifty small caps delivering a 40% year-on-year return in 2023, outperforming Nifty Midcap’s 38% and Nifty 50’s 12%. However, small-caps are inherently more susceptible to economic downturns and market volatility. For instance, during times of market correction, small and mid-caps are more likely to face sharp declines compared to large-cap stocks, which tend to provide more stability and resilience due to their size and established market positions.
Now, about valuations. Many small and mid-cap stocks have experienced significant price increases recently, which has raised concerns about their valuations. These rapid gains might not fully reflect the underlying fundamentals of the companies, making them potentially more vulnerable to corrections. Holding a large portion of small and mid-caps in your portfolio could carry higher risk in such a scenario.
If your portfolio is heavily tilted toward small-caps—say 70% or more—it’s probably a good idea to rebalance. You don’t need to sell everything, but shifting some money into large-caps can lower your risk. That said, if you’re a long-term investor (think 10 years or more), small-caps might still be worth holding onto because they have the potential for big growth over time. For a medium-term horizon, like 3-5 years, mid-caps could give you a nice balance of risk and return.
Looking at sectors, not all small-caps are the same. Sectors like power, transformer cables, consumer durables (ACs, fridges, mobiles), and chemicals are showing strong growth. If you’re staying in small-caps, focusing on these areas could make sense.
Lastly, think about what’s driving the market right now. Domestic liquidity—money coming in from mutual funds and EPFO—is propping things up. But earnings growth has slowed, and fewer stocks are outperforming benchmarks post-elections, which could mean the market is shifting.
So, should you exit small and mid-caps and move to large-caps? It depends on your situation. If you’re okay with short-term ups and downs and are in it for the long haul, you could hold onto some small-caps. But if you’re feeling nervous about the current valuations or need stability, reallocating to large-caps might be the way to go.