Keeping It Largely Stable In Stress

Large-caps provide stability, liquidity, especially in times of stress when mid-and small-caps may find it difficult to deliver. This is what makes them a safe bet for most investors

- NILANJAN DEY

As small- and mid-caps keep gaining momentum, resulting in the feeling that valuations are quickly getting stretched, a section of investors is keen on accumulating large-caps. Their rationale: balance the scales once again with stocks that are now being considered too tardy to add any meaningful value to portfolios.

In the days to come, large-caps are expected to bolster those who have almost entirely focused on the mid-and small-cap segments.

The proponents of the logic refer to recent advances recorded by smaller, medium-sized counters, irrespective of sectors. Their prices have gained handsomely, triggering a round of profit booking. This has generally eluded the larger stocks, many of which have appeared slow-paced in comparison over the same timeline. Further, a section of the market has stayed away from large-caps and, at best, remained neutral on a range of such stocks during this period.

The situation, it is felt, has already resulted in dis-balance, thanks to significant over-emphasis on small-and mid-caps. While it is too early to predict whether large-caps will really get a better treatment, there are several compulsions that are working in their favour.

Perceptions Of Necessity

But why should our portfolios generously accommodate large-caps at all? Can we not derive value from stocks in other market-cap classifications? Though such posers are not so easy to address, I will try to summarise the reasons. First, large-caps help in ironing out a few sharp creases. In other words, the average investor’s portfolio needs the kind of stability that large-caps often provide.

Second, large-caps do not suffer from issues related to liquidity, and third, such stocks actually drive returns during periods of stress. When mid- and small-caps do not deliver, it is up to their large counterparts to push performance.