Understanding how mutual funds function may seem complex to a new investor. As an investor, you would not want to park your money in investment products that you do not understand. Likewise, you would also scout for opportunities that promise stable growth for your money. You can secure this only after having a sound understanding of all the investing options available in the market.
You can certainly seek the help of a financial advisor for guidance but some amount of knowledge is never bad for your financial health. While investing in mutual funds, it is important to understand all the aspects of it.
In this article, we compare the large-cap and mid-cap funds.
The Securities And Exchange Board of India’s move to re-categorise mutual funds in India made it easier for the investors to identify various mutual schemes and compare them. The rulings resulted in the listing of funds in five broad scheme categories: equity, debt,, hybrid, solution-oriented and others. Amongst these, equity schemes were further divided into 10 sub-categories like large-cap funds, mid-cap funds, small-cap funds, multicap funds etc.. On the other hand, debt schemes were divided into 16 sub-categories and Hybrid schemes into 6 sub-categories.
Equity mutual fund schemes are meant for investors with higher risk appetite compared to conservative investors and are looking at a long-term investment with sound returns.
Equity schemes carry various risks as the investments are linked to the stock markets. Amongst these, large-cap funds invest in India’s largest companies by market capitalisation and are therefore considered stable and less risky while mid-cap funds invest in companies that can develop into large cap companies but are currently riskier.
What Are Large-Cap Funds?
As the name suggests, large-cap funds invest in India’s largest companies by market capitalisation. As per Sebi’s norms, large-cap companies are defined as the top 100 companies by market capitalisation. These are established companies with long track records of excellence in various sectors. As a result, these companies are stable and grow at a moderate rate, which tends to make them less volatile than their mid-cap and small-cap counterparts.
Large companies have the biggest revenues, profits, and market shares. They have high standards of corporate governance and legal compliance. Because such companies are owned by a wide range of shareholders, they are also less prone to price manipulation. When the market goes through volatility, large-cap funds don’t turn volatile at the same rate that mid-cap and small-cap funds do. Therefore, large-cap investors remained largely cushioned and get good value for money over the long term. The flip side is that large-cap funds cannot provide the kind of explosive growth possible in mid-caps and small-caps.
What Are Mid-Cap Funds?
These funds primarily invest in companies which are mid-sized. As per Sebi’s definition, these are companies ranked 101 to 250 by market capitalisation. If an investor opts for mid-cap mutual funds, the money is invested for the stocks of the mid-sized companies that have the potential to grow into large-cap companies. These are suitable for investors with high-risk appetite as the mid-cap funds are more volatile compared to large-cap funds. Since there is also the possibility of explosive returns, these funds are best used with a long investment tenure by investors with a high risk appetite.
For a beginner, it may not be easy deciding between large-cap and mid-cap funds. However, your decision should factor in your financial goals, investment tenure, and risk appetite. If your risk appetite is low, you can consider large-cap funds. However, if your risk appetite is high, you can bet on smaller companies with potential for growth.
When in doubt consult an investment advisor.
The writer is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.