Equity Mutual Funds

Large and mid-cap mutual funds

Looking for an equity investment that offers both resilience and growth potential? Large and mid-cap mutual funds could be the right fit. These funds combine the dependability of well-established companies with the expansion prospects of emerging businesses. This makes them an ideal choice for investors seeking steady performance without compromising on long-term returns. 

Whether you’re just entering the market or aiming to diversify your existing portfolio, large and mid-cap funds can be a smart addition. They offer a structured way to tap into India’s corporate growth story while managing risk more effectively than single-segment equity funds.

 

About large and mid-cap

Large and mid-cap funds are equity mutual funds that invest in both large and mid-sized companies. These funds offer a balance of stability and growth, appealing to a broad range of investors. They aim to generate returns by investing in companies with strong market presence and those with high growth potential.

The term ‘cap’ refers to the market capitalisation of a company, which is the total market value of its outstanding shares. Large-cap companies are typically well-established and are known for their stability and consistent performance. Mid-cap companies, on the other hand, are smaller than large-cap companies but have strong potential to grow over time.

Funds that combine these two types aim to provide both safety and capital appreciation. By diversifying across large and mid-sized companies, investors can benefit from steady returns and long-term growth. This asset class sits between conservative large-cap funds and aggressive small-cap funds in terms of risk and return.

 

What are large and mid-cap funds?

Large and mid-cap funds are a category of equity mutual funds defined by regulatory guidelines. As per the rules set by financial regulators, these funds must invest at least 35% of their total assets in large-cap stocks and at least 35% in mid-cap stocks.

Large-cap stocks include the top 100 listed companies based on market capitalisation. These companies are industry leaders with a proven track record and stable earnings. Mid-cap stocks rank from 101 to 250 and are generally more volatile but offer higher growth potential.

The remaining portion of the fund’s assets can be invested at the fund manager’s discretion. This may include small-cap stocks, cash holdings or debt instruments, but the primary allocation will remain in large and mid-cap equities.

This dual allocation allows investors to gain exposure to established companies while also participating in the growth of emerging businesses.

 

Advantages of investing in large and mid-cap funds

The following are some of the major advantages of investing in large and mid-cap funds.

• Balanced portfolio exposure

One of the key advantages of large and mid-cap funds is the balance they offer between risk and reward. Large-cap stocks bring stability to the portfolio, whereas mid-cap stocks add a growth element. This makes them suitable for investors who do not wish to go fully aggressive or remain too conservative.

• Diversification

These funds provide diversification across industries, company sizes and economic sectors. This reduces the overall impact of poor performance in any single sector or company.

• Potential for better risk-adjusted returns

By combining the steady nature of large-cap stocks with the higher returns of mid-cap stocks, investors can potentially achieve better risk-adjusted returns over the long-term. This means the potential gains may outweigh the risks involved when compared to single-cap funds.

• Professional management

These funds are managed by experienced professionals who conduct in-depth research before selecting stocks. This reduces the burden on individual investors to track the markets constantly and choose companies on their own.

• Liquidity

Being open-ended, mutual funds, such as large and mid-cap funds, can be bought and sold at the investor’s convenience. This provides liquidity and flexibility, unlike direct investments in certain assets such as real estate or fixed deposits.

 

How does a large and mid-cap fund work

A large and mid-cap fund collects money from multiple investors and invests it primarily in equity shares of large and mid-sized companies. The fund manager is responsible for selecting the companies, managing the portfolio and making buy or sell decisions based on market movements.

The fund’s objective is to deliver capital appreciation over time. It does so by investing a minimum of 35% each in large-cap and mid-cap stocks. The balance can be distributed across other equities or cash depending on the fund’s strategy.

Returns from these funds are linked to the performance of the underlying stocks. If large-cap companies perform well and mid-cap stocks also show upward momentum, the fund tends to generate positive returns. However, if the broader market falls or certain sectors underperform, the returns may be affected.

The value of an investor’s holding in the fund is reflected by the Net Asset Value (NAV), which is calculated daily. Investors can invest either through a lumpsum or through Systematic Investment Plans (SIPs) based on their preference.

 

Is it good to invest in large and mid-cap funds?

Large and mid-cap funds offer an attractive option for investors looking for a mix of safety and growth. They are generally considered to be less risky than small-cap funds but more rewarding than pure large-cap investments.

In the long run, these funds can help build wealth through capital appreciation while also offering a relatively smoother investment journey. The inclusion of large-cap stocks helps cushion the impact of volatility that may arise from mid-cap stocks.

Moreover, the fund manager’s expertise in selecting quality companies can lead to better stock-picking and optimised returns.

However, like all equity investments, these funds also carry some level of market risk. They are not ideal for very short-term goals. Investors should be prepared to remain invested for at least five to seven years to see meaningful growth.

 

Who should invest in large and mid-cap funds?

Large and mid-cap funds are best suited for investors looking for a balanced mix of stability and growth in their equity portfolio.

• Moderate risk takers

Investors who are not entirely risk-averse but also not willing to take very high risks can consider this fund category. The balanced exposure makes it ideal for those seeking moderate capital appreciation.

• Long-term investors

Large and mid-cap funds are suitable for investors with a long-term investment horizon. Over time, the fluctuations in the market tend to even out, and the growth potential of mid-cap companies starts to reflect in the fund’s performance.

• First-time equity investors

For individuals looking to start investing in equities but unsure about venturing into more volatile segments, large and mid-cap funds offer a good entry point. They provide exposure to equities without the extreme ups and downs seen in small-cap funds.

• Retirement planners

Those planning for long-term goals like retirement can use these funds to accumulate wealth steadily. The dual nature of stability and growth helps in maintaining a consistent upward trajectory over time.

 

How should you invest in a large and mid-cap fund?

Investing in a large and mid-cap fund requires careful planning, from setting goals to choosing the right fund strategy and investment mode.

• Set your goals and time horizon

Before investing, assess your financial goals and how long you intend to stay invested. These funds are ideal for goals like buying a house, funding children’s education or planning for retirement.

• Choose the right fund

Not all large and mid-cap funds follow the same strategy. Some may be tilted more towards growth-oriented mid-cap stocks, while others may lean on safer large-cap stocks. Compare performance, portfolio composition, and risk levels before making a choice.

• Select the investment mode

Investors can opt for a lumpsum investment if they have a large amount ready to deploy. Alternatively, an SIP allows you to invest small amounts monthly, reducing market timing risks.

• Monitor your investment

While these funds are professionally managed, it is still important to review the performance periodically. This ensures the fund continues to align with your financial goals and risk appetite.

 

Taxation rules of large and mid-cap funds

Investments in large and mid-cap funds are subject to the same tax rules that apply to other equity mutual funds. The tax implications depend on how long you stay invested.

• Short-term capital gains

If the units of the fund are sold within one year from the date of investment, the gains are classified as short-term. These are taxed at 15%, regardless of your income tax slab.

• Long-term capital gains

If the investment is held for more than one year, the gains are considered long-term. Long-term capital gains of up to ₹1 lakhs in a financial year are exempt from tax. Any amount exceeding this threshold is taxed at 10% without indexation benefits.

• Dividend distribution tax

Dividends declared by the fund are added to the investor’s income and taxed as per the applicable income tax slab. There is no separate dividend distribution tax, but a Tax Deduction at Source (TDS) may apply if the dividend exceeds a specified limit.

It is important to factor in these tax rules when planning your investments, as they impact the net returns you receive.