Everyone dreams of a comfortable retirement where there is no financial dependence on children or relatives. However, strategic financial planning is important for potentially achieving this goal. In the modern investment landscape, there are multiple options available to an investor today to start planning for retirement early and carefully.
One such option available to investors is a large and mid cap fund. This equity mutual fund category allocates a part of its portfolio to large cap companies with established track records and relatively stable performance. Another chunk is allocated to mid cap companies that may offer higher potential growth opportunities in the long-term.
In this article, we will clear your doubts about the nature of large and mid cap funds, how they perform, their risk-return profile, and whether they may be suitable for building a retirement fund.
Table of contents
Understanding large and mid cap funds
Here are the key features of large and mid cap funds:
- At least 35% of the total assets must be invested in large cap companies, which are those listed between 1 and 100 on recognised stock exchanges in terms of market capitalisation.
- Another 35% must be invested in mid cap companies (101st to 250th on stock exchanges).
- The balance can be invested in equities, debt instruments, cash and cash equivalents etc based on the fund manager’s strategy.
- This dual allocation helps balance the relative stability and lower risk typically offered by large cap stocks with the growth potential and relatively higher risk of mid cap companies.
Read Also: Difference Between Large Cap, Mid Cap, and Small Cap Funds
Why consider large and mid cap funds for retirement planning?
Diversification
These funds provide exposure to large and mid-sized companies, reducing dependence on just one segment of the market.
Relative stability and growth potential
Since large cap stocks are relatively less volatile and mid caps may offer higher potential growth, there is a balance of both in the fund.
Long-term investment
Such funds are designed for extended holding periods, because the risk of volatility is much higher in the short term. With retirement typically being a long-term goal, large and mid cap funds can potentially be a suitable addition to a retirement planning portfolio alongside other options.
Professional management
Fund managers create the portfolio and make investment decisions based on market opportunities, their investment approach and regulatory guidelines. This makes mutual funds suitable for new investors or those who do not have the time or inclination to actively monitor the market and select stocks or rebalance portfolios based on market conditions.
Performance trends of large and mid cap funds
As with all mutual funds, the performance of large and mid cap funds depends on market conditions, among other factors. As on June 27, 2025, the category average performance for large and mid cap funds was as follows:
- 1-year return: 5.81%
- 3-year return: 23.93%
- 5-year return: 24.91%
- 10-year return: 14.58%
Source: AMFI. All returns are for Regular plan.
Past performance may or may not be sustained in future
However, performance can vary significantly between schemes and time periods depending on the fund manager’s strategy, sector allocations and market conditions.
Risk and return analysis
Returns
- Relatively higher growth potential through mid cap exposure.
- Potential for relative stability of capital via large cap exposure.
- Potential for long-term growth.
Risks
- Mid cap volatility, especially during the short to mid-term.
- Concentration risks if fund is biased towards certain sectors.
- Not suitable for short-term investments.
Comparing large and mid cap funds versus hybrid funds for retirement
Large and mid cap funds
- These funds invest only in equity and carry high market-linked risk and volatility.
- Can be suitable for investors with high risk tolerance.
Hybrid Funds
- These funds combine equity and debt.
- They aim to mitigate volatility through fixed income allocation and capture long-term growth potential through equities.
- They tend to be relatively stable as compared to large and mid cap funds
- They may be suitable for investors who can stomach some volatility and equity exposure but seek lower risk than that of pure equity funds.
Key factors to evaluate before investing for retirement
Investment horizon
Investment horizon makes a significant difference. The longer you stay invested, the more compounding can potentially work in your favour.
Risk appetite
Are you comfortable with market risks, especially the chance of high volatility over the short to mid-term? If yes, equity funds can be a part of your portfolio.
Fund consistency
It is always advisable to look for funds with a relatively consistent long-term performance across different market phases. (Past performance may or may not be sustained in future).
Expense ratio
Always check the expense ratio before investing. Lower expense ratios can enhance potential net returns over the long run, while high expense ratio can eat into the potential returns. However, the analysis of expense ratio should be assessed along with performance history and risk-adjusted returns.
Fund manager track record
Check fund manager’s track record. Fund management style, decisions and tenure play an important role.
Read Also: Understand and Analyse Returns in Large and Mid Cap Fund
Tax implications of investing in large and mid cap funds
Like other equity mutual funds, large and mid cap funds have specific tax treatments, which are as follows:
Gains arising from the sale of large and mid cap fund units after they are held for more than 12 months, are treated as long-term capital gains (LTCG). These are taxed at the rate of 12.5% above the Rs. 1.25 lakh exemption limit in a financial year.
If units are sold before 12 months, the gains are considered short-term capital gains (STCG) and taxed at 20%.
While these are the latest taxation rules for equity funds, consulting a tax advisor for tailored investment solutions can help in optimising one’s tax outgo. Tax rules can change from time to time, so it is advisable to check the latest structure or consult a financial advisor when planning redemptions.
Which is more suitable for retirement goals: SIP or lumpsum?
The choice between the two depends on your risk appetite, budget, and capital availability.
SIP benefits:
- Encourages regular investing habits.
- Can mitigate volatility through rupee cost averaging.
- Reduces the impact of market timing.
- May be convenient and affordable for salaried individuals.
Lumpsum investments
- Suitable when there are large funds available.
- Lumpsum investments can magnify returns in favourable markets, but also carry higher timing risk.
For retirement planning, SIPs in large and mid cap funds may be suitable if you’re starting early as they enable you to steadily increase your invested capital through affordable instalments. Moreover, they mitigate market timing risk, average out per-unit purchase cost, and can build potentially wealth over time through compounding.
Are large and mid cap funds a suitable option for retirement planning?
They may be suitable if:
- You have a longer investment horizon.
- You are seeking a balance between growth potential and relative stability.
- You are comfortable with some equity-linked volatility, especially in the short to mid-term.
They may not suit individuals who:
- Are nearing retirement and cannot tolerate high volatility in the short to mid-term.
- Prefer lower risk debt-oriented portfolios or avenues with guaranteed and fixed interest such as FDs, PPFs etc.
Conclusion
Retirement planning is shaped by your life goals, income pattern and risk-taking ability. Large and mid cap funds aim to blend the relative stability of large companies and the outperformance potential of growing mid-sized firms. However, it is important to align your investment choices to your unique risk tolerance and objectives.
FAQs:
What makes large and mid cap funds suitable for retirement planning?
They offer a blend of relatively stable and potentially growth-oriented equity investments that may offer the potential for long-term wealth creation with a more optimal risk-return balance than equity funds that focus only on large cap or mid cap stocks.
How do large and mid cap funds compare to other retirement options?
Compared to fixed deposits or PPF, they carry higher market-related risk but may offer higher long-term return potential. Compared to hybrid funds, they have higher equity exposure and are thus subject to higher volatility in the short to mid-term.
Can I rely on SIPs in large and mid cap funds for long-term wealth creation?
No equity investments guarantee wealth creation. SIPs can help build an investment discipline. It also holds the advantage of rupee-cost averaging which mitigates market timing risk and potentially smooths out interim market volatility. However, investment risks prevail and returns depend on market conditions.
Are there any tax benefits for investing in these funds for retirement?
There are no tax benefits, but investors can qualify for lower tax rates if they hold units for at least a year. Gains arising from sale of large and mid cap fund units held for more than 12 months are treated as long-term capital gains (LTCG). These are taxed at the rate of 12.5% above the Rs. 1.25 lakh exemption limit in a financial year. And if held for less than 12 months, are treated as short-term capital gains (STCG) and taxed at 20%, with no exemptions.
How should I allocate my portfolio across large, mid, and small cap funds for retirement?
For investors with a high risk tolerance, a portfolio mix that prioritises small and mid cap funds early in the retirement planning journey, then gradually shifts toward large cap or hybrid options and eventually to debt-oriented options as retirement nears may be considered. It may also be advisable to allocate some funds to traditional avenues that offer stability and fixed interest such as PPFs or FDs. However, the suitable portfolio mix for you depends on your risk tolerance, objectives, and life situation.
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