As the benchmark indices touch new highs, individuals need to be prudent about their exposure to equities by increasing investments in large-cap stocks now as mid-caps and small-caps look overbought suggesting potential risks, say experts. Many large-cap stocks are seeing robust earnings growth and their valuations are around the long-term average.

The large-caps offer a relatively cheaper investment option compared to mid- and small-caps and would benefit once interest rates start falling next year. This underlines the importance of prioritising large-cap investments in anticipation of better returns. Also, large-cap stocks or funds are ideal for new investors as a higher level of due diligence is needed to differentiate between fundamentally good companies and stocks that are rallying without the basis of underlying business performance.

Similarly, Harish Menon, co-founder and head of Investments and product research, House of Alpha, says opting for large-cap stocks appears to be a prudent choice at this juncture. “If foreign investors resume a net buying position, their focus would primarily be on large-cap stocks in the forthcoming months.”

Weed out the laggards

An investor can consider to exit a fund if it underperforms its benchmark and category over a period of two to three years. For example, in large-cap funds, the difference between the top performing and the worst performing fund is 14 percentage points over a three-year period.

Even if initial investment choices were flawed, the upswing provides a chance to rectify errors and exit with gains. This proactive approach allows for the optimisation of portfolios, ensuring a strategic alignment with robust stocks or funds.

Soumya Sarkar, co-founder, Wealth Redefine, says during bull markets, one should exit unfavourable positions and pivot toward sound investments. “Identifying subpar stocks or funds presents an opportunity to sell during bullish phases, locking in profits. By doing so, investors can strategically reallocate funds into more promising assets during subsequent market downturns,” he says.Booking profits need a good strategy as sometimes there can be reinvestment risk. “Rebalancing of the portfolio can be done in such a way where the asset allocation can be realigned not by redeeming but investing in asset classes where the allocation needs to increase,” says Harshad Chetanwala, co-founder, MyWealthGrowth.com.

Right strategy

Continue with SIPs: Systematic investment plans work in all market conditions without worrying about market levels. So, despite the surge in the markets, one can start a new SIP or continue with SIPs without thinking too much about the market. Give sufficient time to these investments to grow. Those seeking to deploy incremental amounts through SIPs to capture near-term buying opportunities, and as an allocation to the satellite segment of the portfolio, can maintain a large-cap orientation while being neutral-weighted to mid- and small-cap allocations.

Avoid FOMO in stocks: Investors should stay away from the fear of missing out of investing directly in stocks. It is important to recognise the cyclical nature of equities and invest based only on conviction derived through thorough analysis.