Small-cap funds are witnessing an upswing, are they in revival mode?

One reason for this sound performance is that large-cap funds have done well over the past year and stocks in this segment have become expensive due to a lot of liquidity chasing them

Small-cap funds, which performed poorly in 2019, are witnessing an upswing. They are up 9.6 per cent on an average over the past three months. One reason for this sound performance is that large-cap funds have done well over the past year. Stocks in this segment have become expensive due to a lot of liquidity chasing them. So, many investors are now shifting to mid- and small-cap funds, where valuations are more attractive. However, the formalisation of the economy that has taken place due to measures like the goods and services tax will affect companies in the small-cap segment. While some may manage this transition well, others may falter. Hence, go with an experienced small-cap fund manager who has seen a number of market cycles. Keeping in mind their volatility, allocation to small-cap funds should not exceed 10-15 per cent of equity holdings.