How diversified is your equity investment?

It is common knowledge that amongst all asset classes, equity offers the highest returns in the long term compared to real estate, debt and commodities like gold and silver. To top it off tax on equity gains are attractive compared to other assets. Direct equity is too risky and lot of inexperienced investors have had their fair share of losses, due to which Mutual Funds offered an excellent way to give your investments the equity exposure required. Steady monthly growth in SIP numbers reiterates the confidence investors have gained in Mutual Funds.

Within Mutual Funds space there are varied categories that investors can invest in viz. largecap, midcap, smallcap. Amongst these midcap and smallcap funds are perceived to be volatile and risky and not recommended for risk-averse investors or investors looking to invest with a time horizon of less than 5 to 7 years. I come across a lot of investors and even advisors that stick to only Nifty 50 or large caps and at best Flexicap funds to give some exposure to midcap and smallcap funds. Now if we only talk about equity mutual funds, then yes Midcap and Smallcap are high risk compared to Largecaps, but where do they stand in the overall context of equity investing?

If we widen the horizon of equity investments, the following options are available:

1)      Direct stock market investment

2)      MF – Large caps

3)      MF – Midcaps

4)      MF – Smallcaps

5)      PMS

6)      AIF

7)      Private equity

8)      Venture capital

9)      Seed Funding

Not considering Future and Options here because they are more used as tools to speculate and hedge rather than investing. Out of these investment options, after Largecap MFs, I would consider midcap and smallcap MFs as the least risky.

If you look at HNIs and Ultra HNIs, they would diversify their equity investments beyond MFs to PMS, AIF, private equity, venture capital and seed funding. Sure not all of them would have made handsome or MF beating returns, but a lot of them generated alpha returns.

A regular retail investor cannot even participate in the above asset classes except direct stocks and MFs. Let us look at the returns generated by the different Mutual Funds categories:

Table 1: Average 5 Year Rolling Returns

Benchmark	Jan 2010 - June 2025	Jan 2015 - June 2025
Nifty 100	13.42%	14.02%
Nifty Midcap 150	18.25%	18.35%
Nifty Smallcap 250	15.65%	15.63%
Nifty 500	13.91%	14.75%

 Source: www.advisorkhoj.com

Table 2: SIP returns with Annual 10% Increase

Benchmark	2010 - 2014	2010 - 2019	2010 – 2024
Nifty 100	17.18%	11.92%	14.22%
Nifty Midcap 150	23.32%	13.05%	19.81%
Nifty Smallcap 250	22.45%	7.78%	18.01%
Nifty 500	17.40%	11.43%	15.21%

Source: www.advisorkhoj.com

In terms of average 5 year rolling returns, both Midcap and Smallcap Index have beaten the Nifty 100 and Nifty 500. If somebody was a consistent investor in the Midcap space through SIP, he would have made more returns over a 5, 10 and 15 year period. Over a 15 year period from 2010 to 2024, Nifty Midcap has given more than 5% annualized returns compared to Nifty 100. That is a huge margin. In fact; if you had started a SIP in 2010 in both Nifty 100 and Nifty Midcap 150, in the first 5 years Nifty 100 would have resulted in higher returns in 42 out of 60 months, but in the next 10 years, there would not be a single month in which Nifty 100 would have resulted in higher returns or a higher corpus! The SIP returns of Smallcap index from 2010 to 2019 are discouraging; however in smallcaps, active funds have given much better returns and proved to be less riskier than the index.

If you have a 60:40 equity to debt allocation, making a 20% allocation to midcap or smallcap would mean 12% of your overall networth. Surely this much capital would not be on call for the next 5 to 7 years for most investors. If you are a retail investor who has more than 10 to 15 years left for retirement, do not restrict your equity investment to just the top 50 to 100 companies in the country.

Note: The benchmark returns shown here are just taken for illustration purpose and in no way are recommendation for investment