I am 35 years old, and have been investing through Systematic Investment Plan (SIPs) in four equity mutual funds for the past 5–6 years. Over time, my portfolio has become heavily tilted towards mid- and small-cap funds. Should I rebalance by moving some profits into large-cap or hybrid funds, or is it better to continue with my current SIP strategy? Name withheld on request.
It is a very pertinent one and something that most investors fail to understand the ramifications of.
Over the past 5 years, which is also your time frame of investment, there have been two major cycles, i.e. 1) 2021-2024, wherein mid- and small caps performed spectacularly and 2) 2025 onwards, where mid- and small-caps performed very poorly.
Your question relates to a strategy decision: if our objective is to reduce volatility, we rebalance our market-cap allocation from time to time.
If our purpose is to maximise returns, then we let the corpus grow without any intervention.
Before we break down the strategies, let us understand the nature of small and mid-cap investments versus larger-cap ones.
If we take the average return of small- and mid-cap funds over the past 10 years, they would hover around 16% annualised, while over the past 5 years they would be 20% annualised (despite the underperformance of the past year). In the same 5 and 10-year period, large-cap funds have returned between 13.5-14% returns on average, which clearly demonstrates that over long periods, small- and mid-cap funds have the potential to do better than their large-cap counterparts.
However, as they say, with high returns come high risks, i.e., higher volatility, and, in terms of volatility, small- and mid-caps are higher than large-caps. While large-cap funds typically have a volatility of between 13-17%, the same number is between 16-20% in the case of small-caps (in some cases, even higher than 20%)
Hence, as you can see, higher returns come with greater uncertainty.
Now, coming to the strategies.
If you wish to have more control over your asset allocation, then a rebalancing approach works best, where every year the funds are rebalanced to ensure that you stick to a healthy mix of large-, mid- and small-cap funds.
In SIPs, the strategy is designed to capture price correction during high volatility and hence generally mid- and small-caps may deliver better returns over long periods, albeit as mentioned with a higher degree of drawdowns (mark to market losses if markets fall) and also longer periods of underperformance (large-caps typically rebound faster than mid- and small-caps).
To summarize, kindly assess your overall allocation, i.e. both SIPs and existing investments, to ensure they have a healthy mix of all market caps. The best way to do this is to rebalance your lump-sum holdings or existing corpus to ensure a well-balanced mix while letting the SIPs run as they are.
Vivek Banka is the founder of Goalteller.