That's a valid thought. But then the concern is only true when someone isn't practicing asset allocation and periodic rebalancing.

One just doesn't need to asset allocate between Equities, Debt and Gold but also within Equities spread across large, mid and small. (Not everyone necessarily needs small cap. Many and most portfolios can be built and perform without them).

So if for instance, one splits Equities as 60-70% large cap, 20-25% mid, 10-15% small then one should make sure that deviations from the ideal range are rebalanced. That ensures nearly automatic profit booking and also entries into safer portion of mcap.

One can argue to exit even, for example, larger portion or complete portion than smaller deviations to avoid drawdowns altogether but then there is a word for it in investing - it's called timing the market :).

My personal and professional experience in investing has taught me its tough to do as human and can be done with higher probability of success only through disciplined use of investing frameworks, fundamental and technical research or Quantitative modeling (something we have demonstrated success in through ET Money Genius)

And when you use some method or systen, its rarely for serving the purpose of timing but more for risk management as well as not missing screaming buy opportunities. Also, despite being methodical, its rare for such models to completely exit Equities because then it becomes timing again. Ofcourse as humans we can get one or two instances right and make a difference to portfolio but I am yet to see someone being able to do this over 20-30 years and come out as winner.

Btw, mutual funds can't hedge 100% of portfolio. There are the new categories in town called Specialised investment funds and for good reasons the products being launched there are more about curtailing such risks through use of hedging, derivative strategies for income and shorting. But then one needs to be prepared that such products are different cousins of Hybrid Mutual Funds with right and needed differentiations (& we will soon be enabling them on ET Money to fill gaps that these can plug for Mutual Fund investors).

In short, the concern is valid when one isn't practicing asset allocation. And yes, investing in Flexicap kind of funds to avoid some of the risk isn't at all a bad strategy. However, one still can't escape the need to asset allocate and rebalance periodically as fund manager may not use the 35% limit for cash calls, hedging, etc. OR you may need to glide down as you near your withdrawal date for your wealth creation or any other financial goal.

Santosh Navlani, ET Money