Is a 50:50 investment in Large-Cap & Mid-Cap Funds a good idea?
Large-Cap vs Mid-Cap asset allocation can be tricky, especially when the market is experiencing some headwinds. Developments and economic cues can either push the market indices higher or push them off a cliff. The current Omicron scare may coax investors into the panic selling of Equities, pushing market indices lower, irrespective of their market capitalisation.
While writing this, the NIFTY 50 index and The SENSEX was no stranger to the downtrend and volatility. Times like this can become causes for regret if a large part of your portfolio includes Small-Cap Investments. The price drop can be worse in the case of Small-Cap funds NAV.
Here is where Large-Cap funds and Mid-Cap funds enter the picture. Greater investment safety in Large-Cap and Mid-Cap funds is attributed to the relatively lower volatility.
When price falls are significant, it does not necessarily mean that the stock's inherent value has changed. Instead, these are great opportunities for investors to diversify their portfolios by venturing into other sectors at lower prices.
Large-Cap Funds are mandated to invest at least 80% in Large-Cap Stocks and Mid-Cap funds are mandated to invest at least 65% in Mid-Cap Stocks. So if you choose to invest 50% each in Mid-Cap and Large-Cap funds, 100% of your money is invested in the top 250 companies in India. This approach helps you to invest only in good quality stocks listed on the stock exchange.
Benefits of a 50:50 strategy Large-Cap & Mid-Cap Funds
Adopting a 50-50 Mid-Cap and Large-Cap investment strategy offers various benefits:
Reduced risk: Mid-Cap funds exhibit comparatively higher volatility, while Large-Cap funds provide stability. When you invest in a 50:50 ratio, overall, your portfolio risk is reduced and you are poised to get better returns. There are greater upsides to investing in this ratio when market indices rally. However, high returns come with high risk as well. If, as an investor, your risk appetite does not allow you to invest a larger chunk of your money in mid cap funds, investing only in large cap funds is a good idea.
Long-term wealth creation: Mid-Cap funds invest in companies that can multiply the value of your investments in the long term as they have higher growth potential. In contrast, large cap funds protect investors from extreme downturns, as these funds invest in stocks that keep adding value over time . Experts recommend striking a balance between stability and growth for the best results in the long term.
Additional Read: Difference between large cap, mid cap and multi cap mutual funds
Diversified Portfolio: Diversified investment in performing companies can solve the conundrum of 'all eggs in one basket.' If you are planning to invest in a combination of mid-cap and large-cap, it would be better to have a well-diversified fund. Diversification not only helps in reducing the risk but also helps to stabilize the returns in a volatile market.
It is also recommended that investors delve into the performance of funds they wish to park their money before making investment decisions. Due diligence is essential when it comes to deploying hard-earned money.
Risk of the 50:50 strategy
Every investment strategy is designed to give returns in a specific scenario and can’t outperform in all market conditions. The same is true with this 50:50 large-cap and mid-cap strategy. This strategy may underperform if the market is favourable to small-cap stocks or a particular sector. In that case, small-cap or sectoral funds can beat the returns of this strategy.
Additional Read: 3 Reasons Why You Should Invest in Large Cap Fund
It is always advisable to keep a mix of growth and stability in your portfolio, especially when the uncertainty is high. If you remain conservative, you may need to compromise on the returns in case the market takes a rally from here. Simultaneously, there is a risk if the market takes a dip and your portfolio consists of aggressive stocks. The strategy of investing in mid-cap and large-cap is good in volatile times and can provide relatively better returns in different kinds of market scenarios.
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