Just as a joint family has members of all ages, a good investment basket will have instruments of varied market capitalizations and together they make it a stable, balanced packet.
The elderly in a joint family provide the required stability, maturity and keep the family cohesive and stable. Similarly, the large cap stocks act as the core of an investment basket. They are more stable, have seen number of ups and downs over decades and have survived them. Mid caps, like younger members of the family make the investment basket full of zeal and enthusiasm and have a wish to grow big in future. Small caps, like children of the joint family are learning fast to have the potentiality to be the backbone of the family in the longer term.
Therefore, an investment basket must have a healthy mix of large mid and small cap companies to make it stable having potentiality of generating above average returns.
The proportion of these three classes of companies will depend on the life stage, priorities, and risk bearing capacity of the investor.
Someone wanting greater stability might opt for a bigger share of large caps. On the other hand mid / small caps have a potential for greater returns but with a higher degree of risk too.
A criteria that would entail keeping these ratios dynamic would be to have a bigger proportion of mid/ small caps when the markets are in good momentum. An indicator to decide this would be when the broader indices are above their short, medium and longer duration averages.
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