GIVEN THE CURRENT ECONOMIC uncertainties amid global challenges pertaining to geo-political tensions, markets witnessed extreme volatility over the past one year. Its continuance is expected in the short- to mid-term. But the fact remains that India remains one of the bright spots in the global economy and one of the best ways to participate in the country’s growth story is to invest in Indian equities. Investors who wish to benefit from equities need to position their portfolios such that while it brings stability, one does not miss out on the opportunities which the market keeps offering from time-to-time. In other words, risks involved in equity investments need to be managed strategically with focus on long-term wealth creation.
While there are several categories of equity mutual funds, one of the interesting ones is large and mid cap funds. Large and mid cap funds are equity mutual fund schemes which invest primarily in companies with large market capitalisation and those which are second in the ladder―the mid-sized companies. Being diversified, such funds present a suitable equity allocation mechanism wherein investors can benefit from stable growth of established businesses (large cap component) and the high growth prospects in tomorrow’s big businesses (mid cap component). This aids in long-term wealth creation and helps investors reach their financial goals.
Essentially, large and mid cap schemes invest a minimum 35 per cent of the total assets under management each in large cap and mid cap stocks. Depending on the market situations and valuations, such schemes can take exposure to large businesses up to 60 per cent, while in mid-sized companies the maximum allocation can be up to 45 per cent. Further, there could be tactical investments in small-cap companies as well if the valuation turns attractive. Such investments tend to boost the portfolio’s return profile.
Very often investors tend to prioritise stability. As a result, they invest mainly into large cap names and end up missing out on the ability to generate inflation-beating returns. Therefore, a judicious combination of stability and focus on growth is a must in every investment strategy. By investing in large cap, one invests in names which are established and sector-leading. This will not substantially reduce risks owing to volatility, as such names are relatively stable in nature.
On the other hand, though exposure to mid-sized companies, one gets the opportunity to participate in companies with higher growth. But, they do pose relatively higher risk given their volatile nature. Hence, too much allocation to mid cap stocks may prove to be dangerous. Given that these companies are large-cap-in-the-making, they offer attractive value creation. Thus, rather than waiting to invest in such stocks when they grow bigger, it is prudent to invest early and be a part of their growth.
So, what is required is a mix of large and mid cap names. A do-it-yourself strategy may not work for the majority of investors, either due to lack of time to track markets or inadequate understanding about market dynamics. Hence, a professional investment manager is required. Thus, schemes like large & mid cap fund come to the rescue of equity investors through suitable diversification with smart allocation strategy as per the market conditions.
Among the various offerings in the category, ICICI Prudential Large & Midcap Fund is one of the steady performers across the market cycle. Currently, the scheme has selectively invested in stocks and sectors that stands to benefit from the economic recovery through a combination of top-down and bottom-up approach. Over the last three years, the fund has continuously outperformed the benchmark. Investors who seek long-term growth potential and have an investment horizon of five years and above may consider this scheme.
Managing Partner, HSB Associates, Ernakulam