Mid and small cap stocks are having a good FY11. This is given that these stocks in general have outperformed their large cap peers since the start of April 2010. Against the BSE-Sensex's gains of a mere 3%, the BSE-Midcap index has risen by 9% during this period. As for the BSE-Smallcap index, it is up 10% since March end.
Data Source: BSE
Mid and small cap stocks in fact have been outperformers since the bull run started in March 2009. This is after the big declines these stocks had seen in 2008. As we stand now, these two categories of stocks aren't looking cheap anymore. Not even if one factors in a good growth in corporate earnings over the next 2-3 years. As such, following the momentum and buying these stocks (just because they are rising) is highly risky.
So, should mid and small caps be a strict 'no-no'?
Well, the answer is - it depends on your long-term needs and risk appetite. But purely as a matter of prudence, one looking to build a portfolio from a 10 to 15 years perspective can allocate 10-15% each to mid and small caps...and quality stocks in each of these categories.
Treat this allocation towards mid and small caps as just a guide and, we repeat, allocate your equity portion using your understanding of different kinds of companies across different levels of market caps.
Overall, the opportunities to buy good companies at low valuations are still not available in plenty. In such a scenario, the better thing to do will be to make a list of good quality mid and small cap stocks - well-managed simple businesses - that will be worth buying if the markets crack.