A detailed guide to large and mid-cap funds

Large and mid cap funds are mutual funds that invest primarily in stocks of large and middle-sized companies in terms of market capitalisation. Such funds seek to balance the relative stability of large cap companies – which are typically well-established and have a strong track record of good performance – with the growth potential of mid cap companies that are in their expansion stage.

This can make them suitable for investors seeking growth potential as well as relatively low portfolio volatility.

But before one decides to take the plunge, understanding the right time to invest is crucial. Let's look at the key factors and help you decide—is it a good time to invest in large and mid cap funds?

• Table of contents

1. What are large and mid cap mutual funds?
2. Features of large and mid cap mutual funds
3. Benefits of investing in large and mid cap mutual funds
4. Who should invest in large and mid cap mutual funds
5. Things to consider before investing in large and mid cap funds
6. Taxation on large and mid cap mutual funds
7. How can you invest in Bajaj Finserv Large and Mid Cap Fund?
8. Suitability of large and mid cap funds in today's market
9. Risk profile of large and mid cap funds
10. Key features of large and mid cap funds
11. How to balance risk in a large and mid-cap fund

What are large and mid-cap mutual funds

Large and mid cap funds hold a strategic position within the equity spectrum. These funds invest in both large cap and mid cap stocks. This combined category includes the top 250 companies in India, from established industry giants to mid-sized players on an upward trajectory.

SEBI mandates that large and mid cap funds must allocate at least 35% of their funds each in large cap stocks and mid cap stocks.

Features of large and mid cap mutual funds

Large and mid cap funds aim to leverage the relative stability of large cap companies and the growth potential of mid cap companies. Here are some features of large and mid cap funds:

Volatility mitigation: Large cap allocation provides an element of relative stability compared to pure mid cap funds, potentially mitigating the risk of significant losses.

Exposure to growth potential: While large caps offer relative stability, the mid cap allocation offers the potential for significant capital appreciation over the long term.

Diversification: These funds hold a basket of diverse companies across market caps, sectors and themes, spreading risk and mitigating the impact of individual stock underperformance.

Benefits of investing in large and mid-cap Mutual funds

Here are some of the potential advantages of investing in large and mid cap funds:

Balanced risk and return: Large and mid cap funds seek to strike a balance between the relative stability of large cap stocks and the higher growth potential of mid cap stocks. This helps mitigate risk while offering the potential of higher returns than pure large cap funds.

Diversification: Large and mid cap funds offer diversification both in terms of market capitalisation as well as sectors and themes, thus enhancing portfolio resilience.

Professional management: These funds are actively managed by experienced fund managers who monitor market trends and adjust the portfolio composition to optimise the risk/return balance. This relieves you of the burden of individual stock selection and market analysis.

Liquidity: Large and mid cap funds are generally highly liquid, allowing you to trade units on the stock exchange.

Who should invest in large and mid cap mutual funds

Having understood the benefits of these funds, it is now important to understand - who are these funds most suitable for and is it good time to invest in large and mid cap funds?

Consider these mutual fund investment vehicles if:

Long term investment horizon: Large and mid cap funds can be suitable for long term goals (5+ years) as they have the ability to ride out market cycles and benefit from the compounding. Short term investors might be exposed to higher volatility.

Moderate risk tolerance: While less volatile than pure mid cap funds, large and mid cap funds still carry significant risk due to their exposure to equities. If you have a low risk tolerance, consider other options like debt funds or fixed deposits.

Market conditions: Large and mid cap funds might offer a relatively higher return potential during economic and sectoral booms thanks to the growth of mid cap companies.

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

Before investing in large and mid cap funds, investors should keep a few factors in mind, listed below. It is also recommended that you consult a financial advisor before making major investment decisions.

Investment objectives: If long-term high growth potential is your primary investment objective, a pure mid cap fund or small cap fund may be more suitable for you. Large and mid cap funds seek to combine growth potential with risk mitigation.

Expense ratio: Compare the expense ratios of different funds. Higher fees can eat into your returns, so choose a fund with a lower expense ratio.

Track record: Analyse the fund's performance history over different market cycles to assess its consistency and risk management abilities.

Investment strategy: Understand the fund's investment strategy and portfolio composition to ensure it aligns with your risk tolerance and goals.

Taxation on large and mid-cap mutual funds

The capital gain and dividends on large and mid cap mutual funds are taxable. As per Budget 2024, for equity funds units held for more than one year are subject to a 12.5% long-term capital gains tax. However, capital gains of up to Rs. 1.25 lakh are tax-exempt. For units held for less than one year, a short-term capital gains tax of 20% is levied, with no exemptions. Additionally, dividends from these funds, if any, are taxed as per the investor's income tax slab.

How can you invest in Bajaj Finserv Large and Mid Cap Fund?

Visit the Large and Mid Cap Fund scheme page on www.bajajamc.com. Click on ‘Invest Now’ at the top of the page. You will then be required to

1. Login/Sign-up by entering your PAN
2. If prompted, complete your KYC journey/modification.
3. Provide other basic details such as name, mobile number, email address (if signing up for the first time).
4. Input the OTP sent to your registered mobile number and/or email address.
5. Enter your name as per official records, date of birth and bank details. (For first-time investors)
6. Choose between Lumpsum or SIP based on your investment preference and select your investment amount.
7. Proceed with your investment.
You can also invest through distributors and digital aggregators.

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.

Risk profile of large and mid cap funds

Though large and mid cap funds carry relatively lower risk than small cap funds, they are still prone to volatility. The following factors contribute to large and mid cap funds risk profile.

Market risk

Prices of large and mid cap stocks tend to fluctuate with overall market movements. During market downturns, their prices may decline significantly.

Liquidity risk

Mid cap stocks can be less liquid than large cap stocks. This can exacerbate volatility in fund NAVs during market swings.

Concentration risk

Funds may invest heavily in some sectors, making them vulnerable to sector-specific risks. Diversification across sectors is essential. It is therefore important to look at the scheme information document and asset allocation details of the portfolio before investing in a scheme.

Volatility

Mid cap stocks typically see higher volatility in their prices as compared to large cap stocks. A sharp fall in mid cap share prices can drag down the fund NAVs.

Poor stock selection
Some funds may invest in companies with weak fundamentals that are currently earning high returns but may not sustain good performance.

Key features of large and mid cap funds

Balanced portfolio composition

One of the hallmarks of large and mid cap funds is their innate portfolio diversification. These investment vehicles connect both the relatively steady universe of large cap stocks and the more vibrant world of mid cap stocks. The dual exposure ensures that the funds harness the conservative characteristics of large caps and the aggressive growth potential of mid caps.

SEBI-regulated investment strategy

SEBI mandates a specific investment strategy for this category. Large and mid cap funds must invest a minimum of 35% in equity and equity related instruments of both large cap and mid cap companies. This regulation ensures that the essence of either segment is not overshadowed by the other, thereby allowing the fund to retain a true dual-character.

Dynamic risk-reward spectrum

These funds hold a unique position in the risk-reward matrix. While the large cap component offers relative stability and is generally less susceptible to market volatility, the mid cap portion adds a layer of volatility, with the potential of a relatively better return.

Asset allocation advantage

Large and mid cap fund managers possess greater flexibility in asset allocation. Depending on market conditions, economic forecasts, and company fundamentals, managers can switch the weightage between large cap and mid cap components, aiming to enhance the return potential.

Broader universe for stock selection

Compared to pure large cap fund or pure mid cap funds, the category of large and mid cap funds has a wider reservoir of stocks to choose from. The broader selection universe allows fund managers to cherry-pick stocks across market caps, potentially leading to better portfolio construction.

Potential for better risk-adjusted returns

The inherent diversification of these funds, owing to their exposure to both relatively stable large cap stocks and growth-oriented mid cap stocks, might offer better risk-adjusted returns over time. This means that for a given level of risk, the fund might provide a better return potential compared to other categories that focus solely on one segment of the market cap spectrum.

Resilience during market uncertainties

Historically, during volatile market phases, large caps have shown resilience. Meanwhile, mid-caps have the ability to demonstrate higher growth during bullish markets. The dual nature of large and mid-cap funds ensures that they have the potential to weather market storms while still having the ability to capture significant upside during market upswings. The distinctive features of large and mid cap funds make them a good proposition in the mutual fund space. However, it must be noted that past performance may or may not be sustained in the future. By understanding these nuances, investors can better gauge if these funds align with their investment goals and risk tolerance.

How to balance risk in a large and mid-cap fund

Choosing a suitable large and mid-cap fund depends on your unique risk profile and investment goals. Here are some strategies for large and mid-cap fund return potential:

Diversification across sectors: Spread your investments across different sectors to mitigate the impact of sector-specific risks. Large and mid-cap funds often invest in diverse industries, and a well-allocated portfolio can help cushion against downturns in any single sector.

Regular portfolio review: Keep a close eye on your portfolio and conduct regular reviews. Periodic evaluations can help in identifying underperforming assets and making necessary adjustments to maintain the desired risk-return balance.

Risk assessment and tolerance: Understand your risk appetite and tolerance. Assess your financial goals and align them with the risk level you are comfortable with. Large and mid-cap funds can experience market fluctuations, and knowing your risk tolerance is crucial for a resilient investment strategy.

Active fund management: Choose funds managed by experienced professionals with a proven track record. Active fund management allows for dynamic portfolio adjustments, ensuring that the fund remains aligned with market conditions and investor objectives.

Long-term perspective: Large and mid-cap funds can be suitable for investors with a long-term investment horizon. Market fluctuations may occur, but these funds have historically delivered a reasonable return potential over extended periods. Patience is the key for withstanding short-term volatility.

Conclusion

Large and mid cap funds can be suitable for investors seeking a blend of relative stability and growth potential. By understanding their strengths, considering your investment horizon, risk tolerance, and financial goals, you can make an informed decision about whether they belong in your portfolio. Remember, diversification, thorough research, and professional guidance can help you navigate the market efficiently and make confident investment choices.

FAQs

How do large and mid cap mutual funds work?

Large and mid cap mutual funds invest primarily in stocks of large-cap and mid cap companies, respectively. Large cap companies are the top 100 companies by market capitalization in India and are typically well-established firms that are industry leaders. They tend to be less volatile than smaller companies, with the potential to offer stable returns. Mid cap companies are ranked between 101st and 250th in terms of market capitalization. These are often companies that in their expansion phase and offer significant growth potential, but come with higher volatility and risk compared to large-cap companies

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

No, mid cap funds exclusively invest in mid-sized companies seeking to tap into the growth potential of these firms. In contrast, large and mid cap funds invest in a mix of both large-cap and mid cap stocks, aiming to balance the relative stability of large-cap investments with the high growth potential of mid cap stocks. This blend provides a diversified approach to investment. Regardless of your choice, an SIP yearly calculator can help you plan your contributions.

What is the Minimum Amount to Invest in Large & Mid cap Funds?

The minimum investment amount for Bajaj Finserv Large and Mid Cap Fund is Rs 500 for lumpsum as well as SIP.

Is there any tax on large and mid cap funds?

As per Budget 2024, short-term capital gains tax (STCG) of 20% is levied on capital gains of equity funds units sold within 1 year. 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 12.5% tax rate beyond the Rs. 1,25 lakh exemption limit.

What defines a large and mid cap fund?

These funds invest in a mix of large-cap and mid-cap stocks, balancing relative stability, and growth potential.

What are the key features of large and mid cap funds?

Minimum 35% investment in both large cap stocks and mid cap stocks. Diversification, potential for reasonable returns, and a focus on companies of varying sizes are the key features of large and mid cap funds.

Are they suitable for long-term goals?

Yes, they can be suitable for investors aiming for long-term wealth creation.

How do they differ from pure large cap fund or mid cap funds?

Large and mid-cap funds provide a balanced approach, while large cap funds focus predominantly on large cap firms and mid cap funds invest predominantly in mid cap companies.

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.