Investor Asks: Time to Rebalance My Mid-Cap Heavy SIP Portfolio?
A 35-year-old investor has been diligently investing through Systematic Investment Plans (SIPs) for the past five to six years. Their portfolio currently includes four equity mutual funds. Over time, however, the investments have become heavily weighted towards mid-cap and small-cap funds. This investor now faces a crucial decision. Should they rebalance by moving some profits into large-cap or hybrid funds? Or is it better to continue with the current SIP strategy unchanged?
This is a very pertinent question. Many investors fail to understand the long-term ramifications of such portfolio tilts.
Understanding the Market Cycles of the Last 5 Years
The investor's timeframe coincides with two distinct market cycles. The period from 2021 to 2024 saw mid- and small-cap funds perform spectacularly. However, from 2025 onwards, these same segments have performed very poorly. This volatility highlights the core of the investor's dilemma.
The question ultimately relates to a strategic decision. If the primary objective is to reduce portfolio volatility, then rebalancing the market-cap allocation from time to time is advisable. Conversely, if the goal is to maximize potential returns over the very long term, one might let the corpus grow without intervention.
Small-Cap & Mid-Cap vs. Large-Cap: Risk and Return
Before choosing a strategy, it's essential to understand the fundamental nature of these investments.
Looking at average returns over the past decade, small- and mid-cap funds have delivered around 16% annualized. Over the last five years, despite recent underperformance, that figure jumps to about 20% annualized. In comparison, large-cap funds have returned between 13.5% and 14% on average over the same 5 and 10-year periods.
This data clearly shows that over long periods, small- and mid-cap funds have the potential to outperform their large-cap counterparts. However, the old adage holds true: with high returns come high risks, specifically higher volatility.
In terms of volatility, large-cap funds typically range between 13% and 17%. For small-cap funds, that number is between 16% and 20%, and can sometimes exceed 20%. Therefore, the potential for higher returns is accompanied by greater uncertainty and sharper price swings.
Choosing Your Investment Strategy
If you wish to maintain more control over your asset allocation, a rebalancing approach works best. This involves periodically adjusting your fund holdings—perhaps annually—to ensure you maintain a healthy mix of large-, mid-, and small-cap exposure according to your original plan.
The SIP strategy itself is designed to benefit from price corrections during periods of high volatility. Over the long term, mid- and small-cap SIPs may deliver superior returns. However, this comes with a higher degree of drawdowns—mark-to-market losses when markets fall—and potentially longer periods of underperformance compared to large-caps, which often rebound faster.
The Final Verdict: Assess and Rebalance Thoughtfully
In summary, the expert advice is to conduct a thorough assessment of your overall allocation. Consider both your ongoing SIPs and your existing lump-sum investments. The goal is to ensure a healthy mix across all market capitalizations.
The most practical way to achieve this balance is to rebalance your existing corpus or lump-sum holdings. You can shift some profits from mid- and small-caps into large-cap or hybrid funds to reduce risk. Meanwhile, you can let your SIPs continue running as they are, allowing the power of cost averaging to work over time.
Vivek Banka is the founder of Goalteller.
