Large and mid-cap mutual funds are investment vehicles that primarily focus on large-cap and mid-cap stocks. According to the Securities and Exchange Board of India (SEBI) regulations, these open-ended equity schemes must invest at least 35% of their assets in large-cap companies, and a similar minimum percentage in mid-cap stocks.
However, this simple definition does not fully capture the nuances of large and mid-cap funds. The mandatory 35% allocation to mid-cap stocks introduces an element of risk, as mid-cap stocks are generally more volatile than large-cap stocks. That said, these funds are less risky than those focusing primarily on mid-cap stocks, which may allocate up to 65% of their assets to such investments. Meanwhile, the 35% exposure to large-cap stocks offers a degree of stability, but still presents more risk than funds concentrating solely on large-cap companies.
Another key aspect is the remaining 30% of the fund’s corpus. The fund manager has the flexibility to decide where to allocate these assets. If the manager believes large-cap stocks are poised for growth, the allocation will tilt in that direction. Conversely, if mid-cap or small-cap stocks are expected to perform better, the manager may increase exposure to those sectors. This flexibility can lead to varying levels of risk within the same fund.
For investors, the key takeaway is that these funds are typically suited for those with a higher risk tolerance, particularly individuals willing to invest in mid-cap stocks. The exposure to large-cap stocks provides some stability, but investors must be prepared for the additional risk associated with mid-cap investments, which can fluctuate more dramatically based on market conditions.
Despite the complexity, investing in large and mid-cap funds is not something to fear. Prior to SEBI’s categorization of mutual funds, many equity funds predominantly invested in large and mid-cap stocks. During bull markets, most funds leaned more heavily into mid-cap stocks, with some adventurous ones even adding small-cap stocks to their portfolios.
Mutual fund advisors suggest that these funds will continue to evolve over time, with some funds gravitating more toward large-cap stocks and others leaning toward mid-cap stocks. This will allow investors to choose funds that align more closely with their risk preferences. For those seeking a safer bet, large-cap-focused funds offer a margin of safety. On the other hand, aggressive investors may opt for funds with a higher allocation to mid-cap stocks.
For those with a long-term investment horizon and a willingness to accept a higher level of risk, there are several recommended large and mid-cap funds to consider. However, it’s important to stay updated on their performance. For instance, the Axis Growth Opportunities Fund has been in the third quartile for the past four months, improving from the fourth quartile previously. Canara Robeco Emerging Equities Fund has maintained a position in the third quartile for the last 13 months, up from the fourth quartile earlier. Similarly, Sundaram Large & Mid Cap Fund recently moved into the third quartile after previously being in the fourth quartile. On the other hand, Mirae Asset Emerging Bluechip Fund has remained in the fourth quartile for the last 13 months.
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