In falling markets, SIP enables buying at cheaper prices

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l As the markets have become very volatile, should I continue to invest in funds only through SIPs?

—Manas Johri

Given the cyclical nature and high volatility of assets such as equities and gold, it is advisable to invest in a staggered manner, via the SIP route. A SIP facilitates regular investments at periodic intervals, enabling an investor to average out the cost of his investments. This benefits investors in falling markets since they would be buying units at cheaper prices.

The allocation to equities should be a function of your risk profile and investment horizon as related to your goal. Consider rebalancing your asset allocation back to your recommended long-term asset allocation in case of any material drift due to the recent market correction.

l I have been investing in small-cap funds through lumpsum and have earned returns of over 20% over a three-year period. Should I avoid small-caps now because of the volatility?

—Bhaskar Mishra

The small and mid-cap segment saw a sharp rally since the lows of 2020 with benchmark indices more than doubling till date. They have outperformed the large-cap segment by some margin during this period. However, in the recent market correction in the YTD period, the small and mid-cap segment has corrected more than the large-cap segment (S&P BSE 100 fell by 6.4%). Be cognizant of the valuations (forward-looking) as they play a crucial role while determining exposure to any asset class /security. Lower valuations reduce the risk of high future capital loss and improve upside potential, and vice-versa.

Investors should focus on the portfolio allocation across market-cap segments in their portfolio. The bulk of the equity allocation in a portfolio should be into large-cap equities (70-75%) as they are less risky than midcap and small-cap equities, which are more volatile and involve a higher risk of drawdowns relative to large-caps. Based on current valuations, one can be slightly underweight in the small-cap segment.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonalfinance@expressindia.com