Large and Mid Cap Fund vs Mid Cap Fund!

When it comes to investing in equity mutual funds, the first question that arises in the mind of any investor is – which fund is best to invest in? The next is – which fund will provide growth along with stability? The Securities and Exchange Board of India (SEBI) categorises equity mutual funds into Small, Mid and Large Cap funds as per market capitalisation. Each category comes with its own set of pros and cons. However, if one invests in a combination of two categories (say large and mid cap funds), one gets to enjoy the best of both investment options.

Recent data shows that net inflows in the large and mid cap category have reached more than Rs 1,300 crore. While, Net Assets Under Management (AUM) have crossed Rs 1.63 lakh crore (as of September 30,2023). It is clear that retail investors across India are keenly taking an interest in this space.

What are Large and MidCap Funds?

Large and MidCap Funds are open ended equity schemes that invest both in large and mid cap stocks. As per categorization of equity schemes given by SEBI, these funds need to invest minimum 35% each in stocks of large and mid cap companies of India. These include the top 250 companies (first 100 are large caps, and next 150 are mid caps) by market capitalization. By investing in this dual category fund, one gets the best of both funds. While large cap funds aim for portfolio stability, on the other hand, mid cap funds provide potential for high growth.

Who Should Invest in Large and MidCap Funds?

Investing in large and mid-cap funds is not the same as investing separately in each of the funds. Generally, these funds are ideal for investors who want to diversify their investment portfolio. As they are required to invest only at least 35% in stocks of large and mid cap funds each, the fund manager has enough flexibility to invest the remaining 30%. For example, when the market falls, the manager can invest the remaining 30% in large cap funds to gain stability in the portfolio. Similarly, in a bull market, significant allocation can be made in small or mid cap stocks. Ideally, investors with aggressive risk appetite and long-term investment horizon ( i.e. of more than 5 years), should prefer investing in these funds. It is also suitable for investors looking to invest via the Systematic Investment Plan (SIP).

Benefits of Investing in Large and MidCap Funds:

1. Diversification: By investing in a mix of companies of various market caps, one gets the opportunity to diversify the portfolio. As the funds invest in companies of varying sizes, sectors and risk profiles, this also helps mitigate the risk associated with investing in a single asset class. Moreover, this diversification also helps maintain a well-balanced portfolio.

2. Stability & Growth: These funds can capture opportunities present in both large and mid cap stocks. The large cap fund invests in stocks of large cap companies that have already witnessed market storms and thus are less susceptible to market volatility. These funds are also relatively stable than small and mid cap funds. Additionally, mid cap funds invest in mid-sized companies of India, which are widely recognized as the fastest-growing companies in the country. Thus, investing in mid cap funds provide higher growth potential.

3. Flexibility: An investor has the flexibility to switch between large and mid cap companies based on varying market cycles. Additionally, fund managers can play around the remaining 30% asset allocation as per the market conditions.

4. Apt for long term investors: These are ideal funds that fulfill long term investment goals such as building a house, retirement planning or funding higher education. One must invest in these funds minimum for five years to seek stable returns.

5. Less risk than pure Mid Caps: Pure Mid Cap funds usually carry a high level of risk as compared to the large cap or hybrid funds. A combination of mid and large cap funds is a relatively less risky option than investing in pure mid caps.

Things You Need To Check Out Before Investing in Large and MidCap Funds:

1. Investment Goal: One should be careful about the tenure of investment before choosing a large and mid cap fund. These funds are ideal for a long-term investment horizon ( i.e. ideally more than 5 years) to fulfil long-term goals.

2. Expense Ratio: It is the annual fee charged by the Asset Management Companies to manage the mutual fund. While picking up any large and mid cap fund, one must be careful of the expense ratio as a higher value may eat away the profits of the investor.

3. Risk: Although investing in these funds comes with less volatility than investing in pure mid-cap or small-cap funds, these still carry market-linked risks. One must remember that these are equity funds and less prone to market fluctuations.

4. Tax Implications: Taxation on the investment can significantly affect the returns of the schemes. One should be careful about tax considerations before investing in any equity funds. For long-term capital gains (>1 Year), tax-free gains are provided up to Rs 1 Lakh in a financial year. While a 10% Short-term Capital gains tax is applicable on gains exceeding this limit.

Conclusion

Investing in large and mid cap funds is an ideal way to diversify your investment portfolio. It is advisable to invest in these funds through the Systematic Investment Plan (SIP) mode as one can gain the benefits of compounding along with a systematic investment approach. By leveraging the combined strength of stability and growth, these funds can be a trusted choice for those seeking to fulfill long-term financial goals. One can also invest through lumpsum and opt for a SWP (Systematic Withdrawal Plan) or STP (Systematic Transfer Plan) within the chosen large and mid cap fund.