De­pends on one’s risk ap­petite, but it does pay to have a mix of mid- and large-cap funds


Eq­uity mar­kets have, over the past two months, seen sig­nif­i­cant cor­rec­tion. Their bell­wether in­dex, the S&P BSE Sen­sex, has cor­rected around 10 per cent (as on Au­gust 7) af­ter clos­ing at an all-time high of over 40,000 in early June. The fall is much sharper in the case of mid-cap and small-cap stocks as the S&P BSE Mid­cap cor­rected around 11 per cent and 13 per cent, re­spec­tively, over this pe­riod. A mar­ket cor­rec­tion is an op­por­tu­nity for those plan­ning to in­vest in eq­uity to buy cheap. How­ever, since eq­uity in­vest­ment in­volves an ele­ment of risk, re­tail in­vestors may not have the time or the ex­per­tise to know where to put their money. They can choose mu­tual funds which can help them align in­vest­ments in large- and mid-cap funds with their risk ap­petite.


SEBI, or the Se­cu­ri­ties and Ex­change Board of In­dia, de­fines a large-cap fund as one that in­vests in the top 100 com­pa­nies by mar­ket cap­i­tal­i­sa­tion. A mid-cap one, on the other hand, in­vests in stocks of com­pa­nies ranked be­tween 101 and 250 by mar­ket cap­i­tal­i­sa­tion.

Mid-cap stocks are more volatile than their larger coun­ter­parts. Due to their smaller size, mid-cap

com­pa­nies are gen­er­ally more re­spon­sive to eco­nomic cy­cles, which in turn re­flects in their stocks. The gains are larger dur­ing mar­ket ral­lies; the fall sharper in times of a mar­ket down­turn.

For ex­am­ple, mid-cap funds de­liv­ered a 43 per cent return in 2017 while for large-cap funds it was around 31 per cent. In 2018, mid-cap funds reg­is­tered a fall of 12 per cent while large-cap funds went up by one per cent.

In­vest­ing in mid-cap funds, there­fore, is not for faint-hearted in­vestors. How­ever, if held for a long term, they bring bet­ter re­ward than large caps. So, de­pend­ing on your risk pro­file, some al­lo­ca­tion to mid-cap funds does not hurt. “As part of an as­set al­lo­ca­tion strat­egy, mid caps need to form an in­te­gral part of client port­fo­lios. How­ever, in pe­ri­ods of ex­treme over­val­u­a­tion, in­vestors can avoid mid-caps due to their in­her­ent volatil­ity vis-a-vis large caps,” says Vishal Dhawan, founder and CEO, Plan Ahead Wealth Ad­vi­sors. He also cau­tions against hav­ing just mid-caps in one’s port­fo­lio to es­cape their in­built volatil­ity. By con­trast, large-cap mu­tual funds are more sta­ble as they in­vest in com­pa­nies that are bet­ter equipped to deal with eco­nomic cy­cles. “Large-cap or bluechip com­pa­nies have di­verse busi­nesses and/or are lead­ers in their re­spec­tive sec­tors. It pays to be in­vested in the lead­ers or se­cond best as these can weather storms and give fairly con­sis­tent re­turns, com­par­a­tively,” says Sh­weta Jain, founder, In­vestog­ra­phy.


It pays not to put all your eggs in one bas­ket. An MF can help you di­ver­sify your in­vest­ment across funds. “When an in­vestor has Rs 10,000, for ex­am­ple, to in­vest in eq­ui­ties, they can pos­si­bly di­ver­sify into two or three large cap stocks. The risk is higher here. How­ever, when he in­vests this 10,000 in a large-cap mu­tual fund, he in­vests in 30-50 stocks de­pend­ing on the fund. This is a bet­ter port­fo­lio and he gets the ex­per­tise of an ex­pert!,” says Jain. Any port­fo­lio then should have a mix of large-cap and mid-cap funds. Large-cap funds, how­ever, should form the core of any port­fo­lio. The gains from large-cap mu­tual funds may not be as high as from mid-caps in the short term but, over the long term, they de­liver bet­ter re­turns than FDs and are less volatile. Large-cap funds have de­liv­ered an an­nu­alised return of around 10 per cent over the past 10 years end­ing Au­gust 13.

Also, if you are a young in­vestor in­vest­ing for longterm goals, you can af­ford a higher ex­po­sure to mid­caps. But if you are a con­ser­va­tive in­vestor seek­ing sta­ble re­turns, it is bet­ter to stick to large caps. ■

-Renu Ya­dav

Il­lus­tra­tion by AJAY THAKURI

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