Why Invest in a Large-Cap & Mid-Cap Fund?

When it comes to equity investing, there are a variety of mutual funds one can choose from. Some of the most popular ones are market capitalisation-based funds such as the Large-Cap, Mid-Cap and Small-Caps funds. However, if you are an investor looking for exposure to the top 250 listed companies in India, the equity category fund you need to be looking for is the large-cap and mid-cap fund. A large-cap and mid-cap fund is a type of equity mutual fund that invests in a combination of large-cap and mid-cap stocks. The large-cap and mid-cap category of fund was introduced by SEBI in October 2017.

As per the SEBI scheme categorisation rule, a large-cap and mid-cap fund will have a minimum of 35 per cent in large-cap and a minimum of 35 per cent in mid-cap stocks. For the remaining 30 per cent, the fund manager has the flexibility to allocate it in whichever pocket he or she finds attractive. Large-cap stocks are the top 100 names in the listed universe. These are companies which are well-established and are financially stable companies with very large market capitalisation. On the other hand, mid-cap are those names which are ranked from 101 to 250 in terms of market capitalisation.

These are typically companies which are medium-sized and are considered as the future large-cap given their higher growth potential, and hence tend to deliver higher returns than large-cap names. Also, they are relatively more volatile and tend to be riskier than large-caps. So, the approach of a large-cap and mid-cap fund is to have a judicious mix of large-cap and mid-cap names. Since most of the retail investors may not have the understanding of the various market dynamics at play at any given point in time or lack time to track the market, a better approach is to invest in a large-cap and mid-cap fund which offers smart allocation strategy as per the market conditions.

Salient Benefits — There are various benefits of investing in large-cap and mid-cap fund:

1. Diversification: Large-cap and mid-cap mutual fund offers diversification across a wide range of stocks, spread across various sectors and thereby helps to reduce the risks associated with investing in individual stocks.

2. Potential for Higher Returns: Large companies have established businesses and are more likely to generate stable returns while mid-cap companies offer the potential to grow, which can lead to higher returns for investors.

3. Professional Management: Mutual funds are managed by professional fund managers who have extensive experience and knowledge of the stock market. They can identify investment opportunities and make informed decisions on behalf of investors.

Fund Selection — As of April 2023, there are a total of 26 funds in this category. When it comes to selecting a fund, investors should be mindful to check the potential fund’s long-term investment track record. Do not go by just the near-term outperformance or underperformance. Do consider how a fund has done over a complete market cycle. Because when it comes to long-term investments, consistency is what matters. The next aspect to check is the fund house pedigree. This is because over a long term fund houses with strong processes tend to do well. In case all this overwhelms you, then it is best to seek the help of a financial advisor who will help you with the fund selection process.

To conclude, if you are an investor looking for a balance between growth and stability, then investing in large-cap and mid-cap fund can be a good starting point. Given the nature of this category of funds, it is suitable for investors with moderate to high risk tolerance as the combination of large-cap and mid-cap stocks may offer higher returns, but with higher volatility compared to a large-cap fund. While investing in the category, it is important to have an investment horizon of at least three years and above.

Ravi Shankar Agarwal
Director- Swaraj Shares & Securities Pvt Ltd 

The writer is Director, Swaraj Shares & Securities Pvt Ltd ∎  Email : Swarajshares@yahoo.co.in ∎  Website : https://swarajshares.com