A Balanced Approach for Growth

33-Dhilip P.B. Dhilip

IN MUTUAL FUNDS, large- and mid-cap funds have gained significant popularity among investors in India. These funds offer a balanced investment approach by combining large-cap stocks’ stability with mid-cap stocks’ growth potential.

What is a large- and mid-cap fund

The Securities and Exchange Board of India (SEBI), the regulatory authority for mutual funds in India, has classified mutual funds into various categories based on their investment objectives, asset allocation, and market capitalisation. As per SEBI’s classification, large- and mid-cap funds are open-ended equity schemes. Also, these funds must allocate a minimum of 35 per cent of their assets to large-cap stocks and a minimum of 35 per cent to mid-cap stocks.

According to SEBI, large-cap companies are defined as the top 100 companies in total market capitalisation. In contrast, mid-cap companies are ranked from 101st to 250th in terms of market capitalisation. The segregation between the companies is done twice a year―January 1 and July 1. This list is made available on amfindia.com for reference.

Benefits of Investing in Large and Midcap Fund

Growth potential: Large- and mid-cap funds expose investors to stable, well-established companies (large-caps) and emerging companies with growth potential (mid-caps). This balanced approach allows investors to benefit from the potential upside of mid-cap stocks while mitigating some of the risks associated with investing solely in mid-cap funds.

Diversification: These funds provide diversification benefits by investing in a mix of large-cap and mid-cap stocks. Large-cap stocks tend to be more stable and less volatile, providing a cushion during market downturns, while mid-cap stocks can deliver higher returns during bullish phases. This diversification helps reduce overall portfolio risk.

Active fund management: These funds are managed by experienced fund managers conducting in-depth research and analysis to identify high-potential stocks. Their expertise in selecting a well-balanced portfolio can generate better risk-adjusted returns than passive investment strategies.

Long-term capital appreciation: Large- and mid-cap funds are well-suited for investors with a long-term investment horizon who seek capital appreciation. As these funds invest in companies with growth potential, they have the potential to generate attractive returns over the long run.

Category Performance

The performance of large- and mid-cap funds can vary based on market conditions. It is important to note that past performance does not indicate future results. However, historical performance analysis provides insights into how a fund has been managed thus far in varying market conditions.

Historically, large- and mid-cap funds have shown the ability to outperform large-cap funds while offering potentially higher returns than pure mid-cap funds. During bullish phases, mid-cap stocks tend to outperform large caps, driving the performance of this category. In more challenging market conditions, the stability provided by large-cap stocks helps mitigate downside risks.

However, conducting thorough research and due diligence is crucial while selecting specific funds within this category. Factors such as the fund’s performance track record, expense ratio, fund manager’s experience, investment philosophy, and risk management practices should be considered.

If you are an investor who is considering to make an equity allocation and has an investment timeframe of five years and more, this category offering can be a good fit to your portfolio. Given the nature of the fund, it is best to stagger one’s investment through SIP route such that you get to accumulate units across various market conditions and average down the ownership cost over a period of time.

While there are several offerings in this category, one of the prominent name is the ICICI Prudential Lareg & Midcap Fund. The fund is known for its robust performance across various market phases. In terms of SIP, over the past three and five year timeframes, the fund has consistently delivered 20 per cent plus returns, beating both its benchmark and its peer set.

Author is founder of DhiFin Capital