Factors to consider before investing in large and mid-cap funds

Based on market capitalization, companies in India are categorized as large-cap companies, mid-cap companies and small-cap companies. The first 100 in terms of market capitalisation are large-cap companies, the next 150 are mid-cap companies and 251 onwards are small-cap companies. Mutual funds that invest in these categories derive their name from them. So, mutual funds investing in large-cap companies are called large-cap mutual funds, mutual funds investing in mid-cap companies are called mid-cap mutual funds and so on.

But have you ever wondered:

What are large and mid-cap funds?

This is a category of mutual funds where the fund house invests in both large-cap companies and mid-cap companies. According to the Securities and Exchange Board of India (SEBI), a mutual fund can be labelled as a “large and mid-cap fund” only if it invests at least 35% of the total assets in equity and equity-related instruments of large-cap companies and mid-cap companies each (total 70%).
Large and mid-cap funds offer relatively better stability and growth as compared to pure large-cap funds and pure mid-cap funds. However, the risk factor is higher for large and mid-cap funds as compared to pure large-cap funds.

Factors to consider before investing in large and mid-cap funds

Here are three things you must consider before you invest in large and mid-cap funds:

• Your investment objective: Before you start looking to invest in large and mid-cap funds, you must take some time to clearly define your investment objective. This will help you move on to the next steps and choose a suitable mutual fund scheme.
• Your risk appetite: Your investment objective also clearly indicates your risk tolerance with respect to the investment. If you are close to your retirement age and building a retirement corpus, you may have a low risk tolerance. Always take into consideration your expected risk-to-return ratio before investing.
• Your investment horizon: Investing your money in large and mid-cap fund for a long term can prove to be beneficial. As this is an equity oriented mutual fund, it has a long-term investment horizon and can help you in fulfilling long-term financial goals.

Features and benefits of large and mid-cap fund investment

If you are wondering: “Is it worth investing in large and mid-cap funds,” then you need to look at the features and benefits they offer:

• Diversification: Since large and mid-cap mutual funds invest at least 35% of their total assets each in large-cap and mid-cap stocks, they offer higher diversification.
• Higher growth potential: Large conglomerates are stable and past their years of fast growth. This means that you are less likely to see potential of high returns from large-cap mutual funds. Similarly, the high risk that small-cap funds carry is not suitable for everyone. This makes large and mid-cap funds a preferred option for most investors. They have the potential to offer high growth opportunities than large-cap funds.
• Suitable for long-term investment goals: Generally, equity funds tend to perform well in the long term. Consequently, a longer investment horizon is suitable for investing in large and mid-cap funds. You can choose to invest in them to build a retirement corpus, fund your child’s education, build a lump sum for making the down payment of your home and so on.

How are large and mid-cap funds taxed?

Large and mid-cap mutual funds are equity mutual funds and are taxed on the holding period such as:

• Short-Term Capital Gains (STCG) Tax: If you hold your investment for up to 12 months, you will have to pay STCG tax. Currently, the STCG tax rate is set at 15% (plus applicable surcharge and cess).
• Long-Term Capital Gains (LTCG) Tax: If you hold your investment for more than 12 months, you will not have to pay LTCG tax for capital gains up to Rs.1 lakh. However, if your capital gains exceed Rs.1 lakh, the LTCG tax rate is set at 10% (plus applicable surcharge and cess). This gives you another reason to hold your investment in the long haul.

In conclusion, you can invest in the large and mid-cap mutual fund category if you want the balance of lower volatility offered by established organisations and higher growth potential of mid-cap companies. This can give you the benefit of both worlds instead of trading one for the other by investing in large-cap mutual funds and mid-cap mutual funds separately.

FAQs:

What is a large and mid-cap fund?

A large and mid-cap fund is a type of mutual fund that invests in a combination of large and mid-sized companies. These funds aim to provide investors with exposure to a diversified portfolio of companies from different market segments.

How do large and mid-cap funds differ from pure large-cap or mid-cap funds?

While pure large-cap funds focus on large-cap companies and pure mid-cap funds focus on mid-cap companies, large and mid-cap funds combine investments across both segments. This diversification helps investors to potentially benefit from the relative stability of large-cap companies and the growth potential of mid-cap companies.

What are the advantages of investing in large and mid-cap funds?

Investing in large and mid-cap funds offers several potential advantages. By diversifying across both large-cap and mid-cap companies, large and mid-cap funds aim to provide a balance between relative stability and growth potential. This makes them a preferred option for investors seeking a relatively moderate level of risk with the potential for long-term returns.

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 an 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.