Things to know before diversifying your portfolio with Large and Mid-cap Funds

Portfolio diversification is one of the first things you would hear about when you start investing. Diversification essentially means investing in different stocks and asset classes so that you spread the risk. It is as simple as saying that you are not putting all your eggs in one basket. This is why mutual funds offer a higher level of diversification than a direct investment in stocks, bonds and so on.

However, within mutual funds too, diversification can be beneficial. You can achieve this by investing in large and mid-cap funds.

• Table of contents

1. What are large and mid-cap funds?
2. How to build a diversified portfolio with large and mid-cap funds?
3. Benefits of investing in Large and Mid-Cap Funds
4. Things to consider before investing in Large and Mid-Cap Funds

What are large and mid-cap funds?

Mutual fund schemes that invest in equity and equity-related instruments of the top 250 companies, in terms of market capitalisation, are called Large and Mid-cap Funds. According to the Securities and Exchange Board of India (SEBI) mandate, a fund must allocate at least 35% of its total assets in large-cap and 35% in mid-cap companies to be labelled as a Large and Mid-Cap Fund. Please note that the top 100 companies, in terms of market cap, comprise the large-cap companies and the top 101 to 250 companies comprise the mid-cap companies.

How to build a diversified portfolio with large and mid-cap funds?

Here are a few tips on how to build an investment portfolio with large and mid-cap funds:

Classic diversified portfolio:

A 60-40 ratio of equity and debt investments works for most investors who are looking to create wealth in the long term. You can add asset classes like real estate, forex investments, etc. based on your investment goals. Investing a chunk in large and mid-cap funds can help you achieve your financial goals since this category offers a relatively higher return potential over long term.

Aggressive portfolio

If you are a seasoned investor or a young investor who can bear a higher risk, you can build a diversified portfolio that focuses on aggressive growth. You can invest in multiple equity funds like large and mid-cap funds, small-cap funds, and flexi-cap funds in addition to debt funds and other relatively stable asset classes.

Investing in large and mid-cap funds can help you get the relative stability of investing in large-cap companies and the higher growth potential of investing in mid-cap companies. This approach is a relatively stable option than investing in pure large-cap funds where the potential of growth is lower or in pure mid-cap funds where the risk is higher.

Benefits of Investing in Large and Mid-Cap Funds

Investing in large and mid-cap funds offers several benefits, particularly for investors looking for a more balanced approach to equity investments. Here are some key advantages:

1. Growth with relative stability: Large-cap stocks entail relatively low volatility due to their established market presence, while mid-cap stocks offer higher growth potential. This blend helps investors achieve a more optimised risk-return profile.
2. Diversification: These funds invest in a mix of large and mid-sized companies, offering diversification across different sectors, industries and company sizes. This reduces the impact of poor performance in any single stock or segment.
3. Potential for higher returns: Mid-cap stocks generally have more room for growth than large-caps, providing the potential for higher returns. Meanwhile, large caps provide steady returns, creating a balanced portfolio.
4. Mitigating volatility: Large-cap stocks tend to be more resilient during market downturns, while mid-caps can perform well in bull markets. This combination helps to mitigate extreme volatility.
5. Professional fund management: Large and mid-cap funds are managed by professional fund managers who actively select stocks, conduct research, and adjust the portfolio to optimise return potential.
6. Suitable for long-term goals:These funds can be suitable for long-term financial goals like retirement planning, children's education, or buying a house, as they offer the potential to build wealth over time through the power of compounding and growth opportunities in the market.

Things to Consider Before Investing in Large and Mid-Cap Funds

Before investing in large and mid-cap funds, it’s essential to ensure the investment aligns with your financial goals, risk appetite, and overall portfolio strategy. Here are some key considerations:

1. Investment horizon: Large and mid-cap funds are best suited for long-term investment horizons (5 years or more). This timeframe allows the portfolio to potentially ride out market fluctuations and leverage the power of compounding.
2. Risk tolerance: While large-cap stocks add relative stability, mid-cap stocks can be volatile. Ensure your risk tolerance matches the risk level of the fund, indicated by its riskometer in the scheme information document.
3. Fund manager’s track record: The skills of a fund manager can significantly impact a fund’s performance in the long term. Investigate the manager's track record and investment approach.
4. Portfolio composition: Assess the fund’s portfolio composition to understand the allocation between large and mid-cap stocks, sector exposure, and concentration risk. A well-diversified portfolio reduces the impact of individual stock performance.

FAQs:

Large and mid-cap funds vs mid-cap funds: which one to choose?

Mid-cap funds invest at least 65% of their assets in equity and equity-related instruments of mid-cap companies, i.e. top 101-250 companies in terms of market capitalisation. These are mid-size fast-growing companies that have been around for only a few years. They offer a relatively higher return potential but at a higher risk level than large-cap funds and large and mid-cap funds. Large and mid-cap funds, on the other hand, offer relatively stable returns at a lower risk than pure mid-cap funds.

What are the different types of mutual funds based on market capitalisation?

Here are six main types of market cap mutual funds investing in India:

• Large-cap funds: They invest at least 80% of their assets in large-cap companies (Rank 1 - 100).
• Mid-cap funds: They invest at least 65% of their assets in mid-cap companies (Rank 101 - 250).
• Small-cap funds: They invest at least 65% of their assets in mid-cap companies (Rank 251 onwards).
• Large and mid-cap funds: They invest at least 35% of their assets each in large-cap and mid-cap companies.
• Multi-cap funds: They invest at least 25% of their assets each in large-cap, mid-cap, and small-cap companies.
• Flexi-cap funds: They invest their assets in companies of any size with no minimum holding requirements.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.