Contrarian View: Volatile Markets Demand Flexible Asset Allocation

It is common knowledge that your success in investments depends majorly on asset allocation. 

“Asset allocation works on the basis of the old adage “Don’t put all your eggs in one basket.” or in other words diversification across asset classes, especially assets which have low or negative correlation, reduces the overall risk in the portfolio” says Abhishek Kumar, Securities and Exchange Board of India (Sebi) Registered Investment Advisor (RIA) and Founder and Chief Investment Advisor, SahajMoney, a financial planning firm.

An optimal asset allocation strategy across large- and mid-cap stocks balances stability with growth potential. Large-cap stocks, representing established companies, provide stability and resilience, particularly in volatile markets. They typically deliver steady, albeit moderate, returns, making them a solid foundation for portfolios. Mid-cap stocks, while more volatile, offer higher growth potential, as these companies are often expanding rapidly.

The Contrarian View 

During periods of heightened volatility, a common strategy is to decrease exposure to mid and small caps while increasing exposure to large caps. “While this approach seems logical, a deeper examination reveals a more nuanced perspective. The classification of large, mid, and small cap stocks by regulators may not always reflect the true dynamics of the market, especially in a rapidly evolving environment,” says Shashank Pal, Chief Business Officer, PL Wealth Management.

Today's midcaps often exhibit characteristics comparable to or even better than traditional large caps in terms of liquidity, volatility, and returns. “It is essential not to solely rely on regulatory definitions of market caps when making asset allocation decisions. The perception that top mid caps are significantly riskier than large caps may not always hold true in practice.

In fact, Pal says that today’s mid cap companies or even mid cap funds handle a substantial capital relative to large cap companies over a decade ago. “Investors should thus focus on the fundamentals of the company instead of getting stuck in the segregation of market caps,” says Pal. 

In conclusion, when crafting your asset allocation strategy, it is advisable to consider a broader perspective beyond conventional market cap classifications.