Should you consider investing in large & midcap funds?

When it comes to creating wealth over the long-term, savings alone won’t help. It is imperative to invest those savings into various investment instruments available prudently to experience the desired outcome. Between traditional investment options, fixed deposits, mutual funds and several more, investors today have a wide variety of investment options available.

When Ajay’s chartered accountant told him that he should start considering investing, now that he was earning a higher amount of money, 25-year-old Ajay, an IT engineer, was confused. After all, he had started a recurring deposit, as suggested by his parents, and he was also investing in a life insurance policy which would offer him a significant payout at the end of its tenure. However, Ajay’s CA told him that these were not his only options – in fact, they were not even investments, in the real sense of the term. Considering Ajay’s risk profile and return requirements, as well as his desire to start his own company 10 years down the line, his CA suggested that Ajay should consider investing in equity schemes such as the large and mid-cap funds, something he had never heard about.

What are Large & Midcap Funds?

Large and mid-cap funds are equity mutual fund schemes which invest a minimum of 35% of their total corpus in large capitalisation companies, and a minimum of 35% in the stocks of mid cap companies. Large cap companies have a market capitalisation of over 20,000 crores, while mid -aps fall in the 5000 to 20,000 crores category. These funds are helmed by professional fund managers who track the market consistently and undertake trades with the aim to help generate highest possible returns. Large and mid-cap funds would act as an excellent option for Ajay, whose youth ensured his risk profile, investment tenure and return requirements. His desire to start his own company, after a decade, made his investment horizon long enough to withstand risk, while also increasing his return requirement, making him an ideal candidate for large and mid-cap funds.

Pros and Cons to consider

As an investor, it is imperative that you know the benefits and drawbacks of the investment vehicle you choose. The composition of large and midcap funds makes them highly attractive to investors with a medium to high-risk appetite. This is because such funds invest in the comparatively safe large cap stocks, consisting of fundamentally strong companies with a trusted track record, and enjoy stable returns. In addition, such a fund also invests a portion of the corpus in mid cap companies, which are comparatively risky but offer higher returns and have a stronger growth trajectory. The remaining 30% of the corpus can be invested in either large caps or mid -aps, enabling the fund manager to benefit from the trends displayed by the market.

However, you should not opt for large and mid-cap funds if your time duration is short or you have a low-risk appetite because, inherently, the stock market is a volatile and uncertain playground. A short duration would not offer your portfolio the time it requires to overcome volatility and offer robust returns. Finally, a wrong call from your fund manager could lead to losses in your portfolio, so this option is best suited to investors willing to take on a certain amount of risk.

Why invest in Large and Midcap Funds?

As an investor, your primary objective should be to earn the maximum possible returns, while facing the minimum possible risk. If you choose a well-managed large and mid-cap fund with a good track record, you have the ability to realise good returns, while the underlying risk gets managed by the large cap component. Further, investing in such funds enables you to retain and grow your wealth, unaffected by the currently rising inflation, while also offering you the ability to participate in the growth of the market and the economy at large. Investing in large and mid-cap funds is an excellent way to add firepower to your portfolio, in addition to ensuring optimal diversification across the two major categories of the stock market. Finally, you can enjoy the fruits of your fund manager’s expertise, without needing to track the market yourself.

These factors made large and mid-cap funds a superlative investment opportunity for Ajay. If you have also been looking for a suitable investment opportunity, you should definitely consider this option. The only caveat is that one should invest in this category with at least a five years plus timeframe.

Disclaimer: This article is authored by Bhasker Tiwari, Managing Director, Univesto Capital. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Mutual Fund investments are subject to market risk. Read the scheme-related document carefully before investing. Do your own research (DYOR) before deciding to invest in any financial asset class.