Understanding the suitability of large and mid cap funds in today's market

Investors are often faced with the challenge of choosing a suitable investment avenue to meet their financial goals. Large and mid cap equity funds offer a suitable approach to investing by allocating their money to stocks of large and medium-sized companies.

This article aims to provide insights into the suitability of large and mid cap funds in today's market and factors to consider when selecting them.

• Table of contents

1. What are large and mid cap funds and their market condition
2. Suitability of large and mid cap funds in today's market
3. Benefits and drawbacks of using SIPs in large and mid cap funds
4. Factors to consider when choosing large and mid cap funds according to market

What are large and mid cap funds and their market condition

Large and mid cap funds fall under the category of open-ended mutual funds. These funds are mandated by SEBI to allocate at least 35% of their total assets in large-cap companies and another 35% in mid-cap companies. According to SEBI regulations, large-cap companies are ranked from 1st to 100th based on their market capitalisation, while mid-cap companies are ranked from 101st to 250th.

Hence, funds that spread their investments across both large and mid-cap companies are categorised as large and mid cap funds. While the large-cap stock allocation provides relative stability, the mid-cap allocation offers higher growth potential. The market suitability of these funds depends on various factors such as economic conditions, industry performance, and investor sentiment.

Suitability of large and mid cap funds in today's market

Large and mid cap funds can be suitable for different types of investors in today's market. For investors who have a long-term horizon and relatively higher risk appetite, large and mid cap funds can provide much-needed portfolio diversification.

Large-cap stocks provide relative stability during market downturns, while mid-cap stocks offer the potential for higher returns during market upswings. Therefore, investors seeking a mix of relative stability and growth potential may find large and mid cap funds appealing.

Benefits and drawbacks of using SIPs in large and mid cap funds

SIPs for large and mid cap funds

As per SEBI, large and mid cap funds are equity funds that must invest at least 35% of their assets in large cap companies and 35% in mid cap ones. Equity investments carry more risks than fixed-income investments. The risk-mitigating features of SIPs can help better navigate market volatilities, especially in the long-term, through the following:

• Encourages a disciplined investment approach: SIPs inculcate a disciplined investment approach, enabling investors to invest regularly without trying to time the market.
• Rupee cost averaging: SIPs allow investors to average out market fluctuations, which can help reduce the impact of volatility on the investment portfolio.
• Flexibility: SIPs offer flexibility in terms of investment amount and frequency, enabling investors to adjust their investments according to their financial goals and market conditions.

Investors may also perceive the following as drawbacks of SIP investments in large and mid cap funds:

• Market volatility: Equity funds can be volatile in the short term, and investors may experience fluctuations in the value of their investments.
• Lack of control: Investors may feel they have less control over their investments when using SIPs, as they are investing a fixed amount of money at regular intervals.
• Inflationary risks: Investors should be aware of inflationary risks, as inflation can erode the purchasing power of their investments over time.

Factors to consider when choosing large and mid cap funds according to market

When selecting large and mid cap funds, investors should consider several factors to make informed decisions:

• Investment horizon: Determine your investment horizon and risk tolerance. Choose large and mid cap funds that align with your investment goals, time horizon, and risk appetite.
• Market trends: Analyse current market trends and forecasts to understand the direction in which the market is moving. Assess whether large and mid cap funds align with the prevailing market sentiment.
• Economic conditions: Consider macroeconomic factors such as GDP growth, inflation rates, and interest rates. Evaluate how these factors may impact the performance of large and mid cap funds in the current economic environment.
• Fund performance: Review the historical performance of the chosen large and mid cap fund, including the risk-adjusted return, consistency of performance, and volatility. Compare the performance of different funds to identify those with a track record of delivering satisfactory results over a longer time frame.
• Fund manager expertise: Evaluate the expertise and track record of the fund manager. Assess their investment strategy, decision-making process, and ability to adapt to changing market conditions.
• Expense ratio: Compare the expense ratios of different large and mid cap funds. Lower expense ratios can translate into potentially higher real returns for investors over the long term.

Conclusion

Large and mid cap funds offer investors a potentially suitable approach to investing in today's market. Whether you prioritise relative stability or growth, these funds can be used to create a diversified portfolio that can potentially help you achieve your financial goals.

FAQs:

What is the minimum amount to invest in large and mid-cap funds?

Through the Systematic Investment Plan (SIP) route, the minimum investment in such funds can be as low as Rs. 100, and for a lump sum, it can be Rs. 500. However, these amounts may vary depending on the scheme.

Are mid-cap funds similar to large and mid cap funds?

Mid-cap funds focus exclusively on medium-sized companies' stocks, while large and mid cap funds invest in both large and medium-sized companies' stocks. While they share some similarities, they target different segments of the market.

Is there any tax on large and mid cap funds?

Short-Term Capital Gains Tax (STCG) is levied if you sell your investments within 1 year and the gains are required to pay a 15% tax on them. Long-Term Capital Gains Tax (LTCG) is applicable if you hold the investment for more than one year and the gains are subject to a 10% tax rate beyond the Rs. 1 lakh exemption limit.

What are large and mid cap funds?

Large-cap funds primarily invest in well-established, financially stable companies with lower volatility and relatively steady growth potential. Mid-cap funds target medium-sized companies with higher growth potential, though they come with increased volatility and risk. Large and mid-cap funds invest in both large cap and mid cap stocks (with a minimum 35% allocation to each), offering a balanced approach with diversification and a mix of relative stability and growth potential.

Who should invest in large and mid cap funds?

Large and Mid-Cap funds are suitable for investors with a higher risk tolerance and a long-term investment horizon, These funds offer a blend of relative stability from large-cap stocks and higher growth potential from mid-cap stocks.

How do large and mid cap funds balance risk and reward?

Large and mid cap funds seek to balance risk and reward by diversifying investments across both large and mid-sized companies, and across various sectors, which helps mitigate risks. These funds are managed by professionals who research and select stocks to optimise growth potential while mitigating risk.

Is it good to invest in large-cap?

Large-cap funds can be suitable for investors seeking relative stability and the potential for steady long-term growth. However, they may have lower growth potential compared to mid- or small-cap funds in a bull market. Investors who want the long-term growth potential of equities but want to reduce the impact of volatility on their portfolio may consider large cap funds.

How do I choose a large and mid cap fund?

To choose a suitable large and mid-cap fund, shortlist some schemes. Look at the historical performance* of the scheme or the mutual fund company. Look at the fund manager’s track record and experience. Also read and understand the scheme’s investment strategy.

Consider the expense ratio too as higher costs can eat into your net returns over time. Conduct thorough research, review fund documents, and consult a financial advisor for informed decision-making.

*Past performance may or may not be sustained in the future.

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.