Small-Cap Stocks

You have been advocating for quite some time that small-caps and mid-caps may rally in the markets. I am glad I took action based on your advice and have included a few small-caps and mid-caps in my portfolio which are doing really well. I want to know if it is a good idea to buy those small caps that are top holding in top performing small-cap funds?
- Ramesh Firodiya 

Editor Responds: Thank you for writing to us and sharing with us your experience. Yes, the broader markets are likely to outperform and there is logic in your observation that it may be profitable to bet on top holdings of the best performing small-cap mutual fund schemes. As more investments get parked in top-performing small-cap schemes the top holdings may get higher inflows, thus pushing the stock prices higher. The impact could be reverse when the selling happens. However, more aggressive returns are generated by investing in those stocks where mutual funds have just started including them in their portfolios. The trick is to construct a portfolio of quality small-caps. The top holdings of best performing small-cap funds can definitely form a part of such a portfolio. Keep writing to us!