Responsible Investing by Retail Investors

Responsible Investing:

The Pain in Mid- and Small-Caps Has Just Begun

Hello everyone,

As we step into 2025, I want to share some insights that are rooted in conversations with fund managers over training session, my own research, and interactions with many of you.

Responsible investing—a subject more relevant than ever given what we’re seeing in mid and small cap stocks.

Over the last few months, almost every fund manager I’ve spoken to has shared a bearish outlook on mid and small caps. Our independent research pointed to the same basis data collated at our end with backtesting results of last 5 years and Macros of the economy. This lead to the same conclusion, leading us to communicate caution and a reduction in exposure (Covered in Sept'24 Blog)

In my last quarter messages, I reiterated this. Yet many clients remain unfazed When Confidence Peaks, Caution Is Key.

This week, I met with an 60-plus-year-old client—a seasoned investor.

For months, I’ve been urging him to reduce his mid-small-cap exposure. Despite my warnings, he remains steadfast, armed with rationale after rationale for why this segment will perform well. His belief is unwavering, driven by a long-term view and recent market performance.

But let’s pause and reflect.

•When seasoned fund managers are nervous, why are individual investors super confident?

•Why do professional risk models flash red while retail investors see green lights?

•Why do they believe in TV stories and Fin influencers and not their own advisors/distributors?

The Behavioral Trap:

Recency Bias and Overconfidence

In investing, confidence often peaks just before trouble begins. The last few months felt like a vindication of retail investors’ decisions, as mid- and small-caps continued to rise. However, this false sense of security can blind us to looming risks.

Remember:

•Recency bias makes us believe that what worked recently will continue to work.

•Long-term investing doesn’t mean holding risky assets through a drawdown when market cycles clearly shift.

It’s true that small- and mid-cap companies have immense potential. But every investment must be viewed through the lens of valuation, market sentiment, and macroeconomic reality. Today, those signals suggest that the pain in mid- and small-caps has only just begun.

What Responsible Investing Means Today

1.Avoid chasing past winners:

Just because mid- and small-caps have done well doesn’t mean they’ll keep doing so.

2.Balance your portfolio: Diversification into large-cap and multi-cap strategies provides stability along with Debt Funds or hybrid funds.

3.Listen to professional guidance: Fund managers use data and experience to assess risks that aren’t always obvious.

Remember:

Volatility is temporary, but permanent loss of capital can derail your financial goals.

Conclusion:

Responsible investing is about managing risk as much as seeking returns. We believe this is a time to stay disciplined and follow a research-backed strategy, even if it feels counterintuitive. While short-term gains may tempt us to hold onto mid- and small-caps, the best investment decisions are often the hardest to make

If you’re feeling unsure about your portfolio exposure, we’re here to help. Let’s work together to ensure your investments align with your goals and today’s market realities.

Stay safe, stay diversified, and invest responsibly to garner the gains of India's long term Growth Story.

Regards,

GYC by Dinesh Aneja

+91 8800 203200