Which cap is yours – mid-cap or large-cap?
 

 

It is imperative to understand the meaning and relevance of mid cap and large cap funds before making them a part of your investment portfolio.

Having realised the potential of returns in mutual fund investing, you might be keen on parking some funds into this investment route. You may also be aware of the linkage between risk and reward involved in equity-oriented mutual funds. But then your decision-making skills are put to a real test as soon as you start researching on types of funds.

For the last couple of years, there is a flurry of ‘mid-cap’ and ‘large-cap’ funds in the market. And choosing between the two is a challenge. Let’s discuss the meaning and relevance of these funds before you get them into your portfolio.    

What is a large-cap fund?
A large-cap fund primarily invests in companies with large market capitalisation. Although, there is no fixed definition of a large-cap company in India, in the international arena companies with market capitalisation of more than USD 2-billion are regarded as large caps. That implies that a large-cap company is one with a market cap of more than Rs 8,000 crore.

Market capitalisation is calculated by multiplying the total number of shares issued by the company with price per share. For instance, if ABC Limited has issued 1 lakh shares in the market and each share has a cost of Rs 250, it’s market capitalisation will be: 1-lakh shares x Rs 250 = Rs 25 crore.

Examples of large-cap companies: Indian Oil Corporation (IOC, Reliance Industries Limited (RIL), Infosys, Wipro, Bharti, ITC, Tata Steel, SBI, HDFC, ICICI, BHEL, L&T etc.

Should you invest?
From the examples of large-cap companies, you would have deciphered that these are usually frontline/blue chip companies. Investing in these companies through large-cap funds offers a relatively safer investment option since these companies have shown favourable performance over a consistent period of time and proved the ability to succeed over hiccups that come up during their initial years of operation.

However, funds investing in these companies offer moderate-to-low returns in comparison with small and midcap funds as large-cap companies have already surpassed their period of dynamic growth and thus their share prices move up in a moderate fashion.

What is a mid-cap fund?
As per the BSE Midcap Index, a company with market capitalisation between Rs 500 crore and Rs 8,000 crore can be categorised as a mid-cap company. The index is topped by Divi’s Lab, which has a market cap of about Rs 7,800 crore.

Other examples of Small Cap companies: IVRCL Infras, Amtek Auto, India Cement, IFCI, Voltas, Titan, RNRL, Thermax, TV18, Rolta, Moser Baer, Exide, Aurobindo Pharma, Britannia, Yes Bank etc.

Should you invest?
The beauty of investing in mid-cap companies through mutual funds is that you can become a part of the success of well-positioned companies selected by professional fund managers and can thus achieve superior investment returns. After all, Infosys, Satyam, Bharti were all mid-cap companies in their initial years and today they are pioneers in their respective industries.

A top-performing mid-cap fund may garner annual returns of as high as 10-15 times more than large-cap funds. However, equal are the chances of you ending up with a major erosion in the value of your investments owing to the high risks involved with investing in mid-cap companies.

Final Word
Investing in mid-cap oriented funds should be done with a time horizon of at least 3 years, preferably more than 5 years. The same also holds true for large caps if you want to see a significant appreciation in the value of your portfolio.

Alternatively, you can have a blend of both types of funds (with proven track record) in your kitty, as per your risk and return appetite, and of course, your cash requirements for the near term.

In Brief:

q      A host of ‘large-cap’ and ‘mid-cap’ funds are available in the market today, and the success of your investment goals depend on choosing the right one.

q      Large-cap funds invest in blue chips with market capitalisation of more than Rs 8,000 crore. They are relatively safer than mid-cap ones but may offer conservative returns. 

q      Mid-cap funds invest in companies with market capitalisation of anywhere between Rs 500 crore and Rs 8,000 crore. These funds can bring you superior returns as mid-cap companies enjoy dynamic growth.

q       Selecting between the two should be as per your risk and return appetite. You can also have a blend of both types of funds in your portfolio.

The investment horizon should be above 3 years, preferably, over 5 years for both types of funds.


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