Mutual Funds have many schemes in different asset classes-equity, debt, gold and hybrid. Within equity mutual funds, they are classified as large, multi, mid, small, sector and international funds. For someone investing for the first time, it becomes difficult to understand the difference between all these. This makes decision making tedious and investing difficult. Through this post, we intend to simplify the same by explaining the difference between large and mid-cap funds. By the end of this post, you will have a fair idea of the key differences and which category to invest in.
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What are Large-cap Mutual Funds?
Large-cap funds are mutual fund schemes that invest in large-cap stocks that are listed on the stock exchange (BSE & NSE). As per the classification by SEBI, large-cap stocks are defined as the top 100 companies’ basis their market capitalization. Presently, Reliance Industries is the largest company in India based on this criterion. The top 10 large-cap stocks in India are Reliance, TCS, HDFC Bank, HUL, HDFC Limited, Bharti Airtel, Infosys, Kotak Mahindra Bank, and ITC. As we can see these are some top names in the Indian corporate sector with products and services used by many. Large-cap stocks are also called blue chip stocks and some large-cap funds also go by the name blue chip funds. Since these funds invest in the biggest companies in India, they assure portfolio quality. As per the SEBI mandate, these funds must invest a minimum of 80% in these top 100 companies and have the flexibility to invest up to 20% beyond the top 100 companies. To know about the best large-cap funds, you can read another post of ours- https://www.wishfin.com/mutual-fund/three-best-large-cap-mutual-funds/
What are Mid-cap Mutual Funds?
Mid-cap mutual funds are those which invest in mid-sized companies listed on the stock exchange (BSE & NSE). As per SEBI’s classification, all companies from 101st to 250th are classified as mid-cap companies. Thus, these are companies that are smaller than large-cap companies. Mid-cap companies provide high growth opportunities since they have a lower base and a long runway ahead. A typical mid-cap mutual fund portfolio holds 50-80 such companies. These are bought by mutual funds after thorough research and due diligence. To know about the best mid-cap funds, you can read another post of ours- https://www.wishfin.com/mutual-fund/five-best-performing-mid-cap-funds-to-invest-in/
Key Differences Between Large & Mid-cap Mutual Funds
Mid-cap stocks can grow faster than large-cap stocks since they have not peaked in terms of revenues and profits. They are still in a growing stage. On the other hand, large-cap stocks also grow but the pace of growth could be slower than mid-cap stocks. This means mid-cap mutual funds can grow faster than large-cap mutual funds, but growth should not be the only criteria to buy a fund. One should look at growth in combination with other factors discussed below.
If we look at the past track record or past performance of these funds, mid-cap funds have performed better than large-cap funds over a longer period whereas large-cap funds have done better in the short term. In the last 10 years, mid-cap mutual funds have returned on an average 11.09% per annum, while large caps have delivered 7.53%. These are the average returns of all the funds in the mid & large-cap universe. There could be individual funds that would have outperformed or underperformed this average.
Large-cap funds are less risky than mid-cap funds. Mid-cap funds comprise of companies that do not have a very large business and could be prone to losses or defaults during economic downturns. However, large-cap companies are solid and have large businesses that can withstand economic downturns and grab market share from smaller companies. This makes large-cap funds a safer bet.
Mid-cap funds are more volatile and could witness sharp movement in NAVs both on the downside and upside. Large-cap funds, on the other hand, are less volatile than mid-cap funds.
Large-cap funds should be a core holding in any equity allocation. A major chunk should be invested in large and multi-cap funds if you have decided to invest in equity mutual funds. This could vary from 30-80% from individual to individual. Mid-cap funds are suitable for people with a higher risk profile and a long term time horizon. One should invest in mid-cap funds only if he is willing to hold on to that investment for the next 10 years at least.
Large-cap mutual funds should be an integral part of any individual’s equity portfolio. These are funds investing in the best Indian companies and carry the lowest risk among all equity funds. We recommend a high allocation to large-cap funds in ones’ portfolio. Mid-cap funds present a higher growth possibility resulting in higher returns over a long period. The prudent way of investing in mid-cap mutual funds is to have the right allocation based on your risk profile and hold on to your investments even in volatile times to reap the benefits. It should not be either or between large and mid-cap funds. One can invest in both, basis his/her asset allocation. To know more about the right asset allocation, you can read another post of ours-https://www.wishfin.com/mutual-fund/what-is-asset-allocation-in-mutual-funds/