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All You Need To Know About Large and Mid Cap Funds

ICICI Securities 12 Aug 2022
  • Large and mid-cap funds invest both in large-caps and mid-caps
  • They can move among the top 250 companies by market cap
  • They are mandated to invest 35 per cent each in large-caps and mid-caps
  • They can benefit by changing allocation in different market scenarios
  • They can provide both stability and growth within the equity universe

In 2017, capital market regulator Securities Exchange Board of India (SEBI) came out with an exhaustive circular about the categorisation of mutual funds. The objective of the circular was to ensure that a mutual fund investor is able to evaluate the different options available before taking an informed investing decision.

As per the categorisation ruling, the equity category was subdivided into 10 sub-categories. Apart from a separate sub-category of large-cap, mid-cap and small-cap, a new sub-category was introduced that was a combination of large-cap and mid-cap.

Here’s all about the large and mid-cap category.

What Are Large And Mid Cap Funds?

If we explain this category in two simple words, it provides investors both stability and growth within the equity universe. As the name suggests, large and mid-cap funds invest in a combination of large and mid-cap companies.

While the top 100 companies in terms of market capitalisation are large-cap companies, the next 150 companies are mid-cap.

Market cap is the value of the company that is determined by multiplying the company’s total number of shares outstanding with the share price of the company. 

Large and-mid-cap funds have the advantage of allocating funds in 250 companies. However, according to the SEBI ruling, large and mid-cap funds are required to invest 35 per cent each in large-cap and mid-cap companies. The large-caps provide stability to the portfolio, while mid-caps have the growth potential.

Why Should You Invest In These Funds?

The fundamental principle of investing is diversification. By investing in one large and mid-cap fund, you get the advantage of both large-caps and mid-caps in a single fund. One may argue that if diversification is the key, one could also invest in large-caps and mid-caps separately.

You can, of course, invest in two different funds, but the benefit may not be the same as that in a large and mid-cap fund. A pure large-cap fund is mandated to invest 80 per cent of the portfolio in large-caps, so the fund manager has the flexibility to invest the remaining 20 per cent in mid-caps and small-caps. Similarly, a pure mid-cap fund is mandated to invest 65 of the corpus in mid-cap companies. This way the fund manager has the flexibility to play with the remaining 35 per cent in terms of the market cap.

However, in a large and mid cap fund, the fund manager has ample room to deploy the corpus across market caps. For instance, in a falling market scenario, the fund manager has the freedom to tilt 65 per cent of the portfolio towards large-caps to protect the downside and maintain the remaining 35 per cent in mid-caps, as mandated by the market regulator. Similarly, in a rising market scenario, the fund manager can allocate a higher proportion of the capital towards mid-caps and small-cap companies to boost the overall returns.

Conclusion

Large and mid-cap funds are better equipped to take emerging opportunities from the large- and mid-cap spaces in varied market scenarios as they have more flexibility to switch between large-cap and mid-cap companies. Therefore, they have the ability to deliver better rewards to the investors in the long run.

Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100.  AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.

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