The choices we put were - a basket across all market caps, large caps, mid caps and small caps. Only 8.6% went for midcaps, while 2.6% went for small caps. An overwhelming 88.8% preferred large caps or a basket of stocks containing large caps.

The preference of large caps is perfectly understandable in the context of what happened in 2007 and 2008. As can be seen in the charts below, both the BSE-Midcap and the BSE-Smallcap indices kept pace with the BSE 100 (made up of large cap stocks), during 2007. In fact, in the last leg of the bull market towards the end of 2007, mid-caps and small-caps actually outperformed the large-caps. However, it was a different story in 2008, when the equity markets collapsed. Mid-caps and small-caps were hit much harder in the carnage than the large-caps.

Large-cap stocks represent the preeminent companies in India. They generally have large scale businesses and also large volumes of shares traded on the stock exchanges. Hence, their market capitalisation tends to be less volatile than the mid-caps and small-caps. Mid-cap and small-cap stocks tend to rally the most in the last phase of a bull market. They also tend to decline the most in a downturn. Your aversion to mid-cap and small-cap stocks clearly takes into account the greater volatility in the space. We agree with that assessment.

But the question remains - Is volatility always harmful? Volatility could actually be a blessing in disguise. Given that the prices for the smaller companies have corrected sharply, perhaps now is the right time to start looking for the high quality companies among them. After all, the good ones have the potential to record much higher growth rates as they increase in size. Of course, the investor needs to be extra careful while making this assessment.