WHICH CAP FITS BEST?
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.
MID-CAP OR LARGE-CAP?
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.
WHAT MAKES A GOOD PORTFOLIO?
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. ■