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Financial Planner - Answered on Feb 06, 2023

Vivek Shah is a SEBI registered investment advisor and certified financial planner from FPSB India. He has over 18 years of experience in financial planning.
Shah founded Finrise, a financial planning and wealth management firm, in 2011. He believes that equity investment is the only way to generate long term wealth.
He has an MBA in finance, a degree in chartered accountancy and is a registered life planner from Kinder Institute of Life Planning, USA.... more

Question by Payal on Feb 06, 2023Hindi

My friends claim that small cap mutual funds peform way better than index funds. Can you please guide whether I should buy small cap funds and what should be allocation to the same?

Ans: First of all as an investor and also managing your family finances, you need to answer following questions before deciding on which instrument you want to invest

1) Goal or financial goal or purpose of doing investment. This will matter a lot as a goal of child education and retirement needs to see with different perspective and also should have asset allocation and market cap exposure accordingly.

2) Time Horizon of your goals- this is very important as it will help you to select the asset class and it's allocation based on your time period of financial goals. This is where investor makes biggest mistake of misalignment of asset time cycle and goals time period. If you allign this properly, your journey will be quite smooth.

3) Optimum Return expectations on your capital invested-
If you are saving and investing for some better future to fulfill your goals offcourse you will ask something in return which should be respectable higher returns than inflation for long term period( more than 7 years). If you are investing in India than equity return assumptions and calculations should be based on 12% return expectations and debt it should be 6.5%. Remember that you should assume practical return assumptions ( not the highest or what your friend says) as you can put any number in the excel sheet for your mental satisfactionðŸ˜ƒ

4) Risk taken on your capital-
Risk is a very negative word being taken in india but actually it's the risk appetite and risk acceptance of an investor which makes his outcome/ returns favourable. Understand one thing that if you want high returns you have to assume high risk and there is no option for it or an investor has to be happy with sub optimal returns if he is not ready to take risk.

Risk according to me is the capacity of a person until where and when he will not have any palpation in his stomach and he can absorb the downside easily( both realised and majority of time unrealised).

After looking at all these parameters you can think of taking allocations to small cap and decide how much allocation to smalll cap funds or small cap stocks is comfortable in your portfolio.

And after all that, i would say it's your behaviour and emotions management which will help you create wealth in the equity market.

I hope this helps. Happy investing

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