What are Large and Mid Cap Funds: Features, Advantages, Taxation

 

Large cap funds are the funds that invest in equity shares of companies with large market capitalization. Large cap companies fall in the top 100 ranks of SEBI’s list of categorization. These companies are known to be well-established players in the market and tend to have a remarkable performance record.

Mid cap funds are the ones that invest in equity shares of companies with medium-sized market capitalization. These companies fall between the ranks of 101 and 250 of SEBI’s list of categorization basis the company size. Being highly exposed to volatile market conditions, these funds require high risk tolerance from the investors.

Understanding Large and Mid Cap Funds

Large and Mid-Cap Funds are open-ended equity schemes that invest in the stocks of companies with large and medium-sized capitalisations. These funds are bound to invest a minimum of 35% each of their total assets in equity and equity-related instruments of large and mid cap companies.

Large and Mid Cap funds select stocks for investment from the largest 250 stocks listed in the Indian markets. It must be noted that the larger stocks involve lesser risk, while the smaller stocks possess high growth potential.

Additionally, it must be noted that there are two kinds of schemes in large & mid cap mutual funds- one that has more of large cap stocks, and the other that has more of mid cap stocks. In such cases, investors may keenly consider the portfolio and fund manager’s strategy before investing. It is suggested that you invest only in the schemes that suit your investment horizon, risk appetite, and financial objectives.

For instance-

If you are not willing to accept a higher level of risk with your funds and wish to take the safer route, invest in funds that are dominated by large cap stocks. On the other hand, if you are an aggressive investor with a higher risk appetite, you may invest in funds that have a major portion of their investments in mid cap stocks. However, the latter will have increased chances of offering higher returns in the long term.

To know more about the Best Performing Large and Mid Cap Funds 2020, Click here

Features

Here is what you should know about large & mid cap funds-

• These funds are known to diversify their investments in between large and mid-sized capitalisation companies
• The ratio in which the investment is made may differ from fund to fund between large and mid cap stocks; however, the minimum amount to be invested in each of these stocks is fixed at 35%
• Any remaining portion that the fund may have, after investing their share in large and mid cap stocks is invested in debt and money market instruments
• Due to the fund’s exposure to mid cap stocks, the risk involved in these funds is on a higher plane in comparison to a pure large cap fund

Advantages of Investing in Large and Mid Cap Funds

• Having invested a minimum of 35% of their stocks in large caps, these funds offer stability and balance the risk involved
• Since a part of the total assets are invested in mid cap stocks, investors get a high chance of benefiting from the high returns offered
• Large & mid cap funds will help you meet your long term goals with the stability of large caps, along with the agility of mid-caps while creating wealth over the course of your investment duration

Who should Invest in these funds

• If the safety of large cap funds along with the high returns of mid cap funds appeals to you, you could consider this fund rather than investing in two different funds of separate market capitalisations
• Since these funds invest in companies of mid-sized market capitalization, it is necessary that investors stay patient and wait for the fund to perform in the long term. Hence, it is suggested that you invest in these funds only if you have a longer investment horizon; a minimum of 3-4 years, to be specific
• With investments in mid-cap stocks, the fund brings along a moderate level of risk. Therefore, investors with a high risk appetite may only consider putting in their corpus in these funds
• Although large and mid cap funds are less risky than pure small cap schemes, they tend to be riskier than multi-cap funds, unlike large and mid cap funds which have a specified exposure to each category (35%)
• It is suggested that you invest in these funds only if you have some knowledge of the financial markets and wish to keep track of the fund’s performance. If this isn’t the case and you still seek to invest in equity you could opt for purely large cap funds

Best Large and Mid Cap Funds

As of January 2020, you may consider investing in the following large and mid cap funds basis their 5-year returns, which is considered an ideal investment horizon for such funds.

Fund Name	AUM (Cr)	3-year Returns (%)	5-year Returns(%)
Mirae Asset Emerging Bluechip Fund	₹ 9,516	18.08	16.65
LIC MF Large & Mid Cap Fund	₹ 603	18.73	15.25
Canara Robeco Emerging Equities Fund	₹ 5,339	15.06	13.12
Invesco India Growth Opportunities Fund	₹ 2,239	16.76	12.39
Principal Emerging Bluechip Fund	₹ 2,117	13.14	12.19

Data as on January 20, 2020; Source: Value Research

Things to be Considered

Considering the growth potential of these funds, there are high chances that you may fall for the returns offered and make uninformed decisions. Therefore, before you invest in these funds, you are advised to keenly consider the given points in order to make a wise choice.

• Returns offered– Being bound to invest a minimum of 35% of the total assets in large cap stocks, the fund tends to offer higher returns in the long term. Large caps are known to provide stability across market cycles, thus building chances of higher returns. However, the volatility of mid caps cannot be ignored
• Risk involved– These funds are exposed to a minimum of 35% of mid cap stocks, which are considered to be highly volatile. Hence, it is suggested that you invest in these funds only if you have a tolerance for risky and volatile funds
• Investment horizon– Because of the involvement of mid cap and large cap stocks in the portfolio, sticking to the scheme for a longer period of time (a minimum of 4 to 5 years) is highly important in order to make extra returns. Being comparatively new in the market, mid cap stocks demand a long term to perform and deliver high returns
• Fund history– Before you decide to invest in these funds, you must carefully study the fund history and it’s past performance. Studying the fund’s performance for over 5 years in the past may give you a clear idea of the scheme’s investment pattern

Taxation

The Short Term Capital Gains (STCG) from the investments in this fund are taxed at 15%, if the units are sold within the time period of 1 year from the date of allotment. However, the Long Term Capital Gains (LTCG) made on the sale of units priced at over Rs. 1 Lakh, within a year from the date of allotment is taxed at 10% without indexation.

For example-

If an investor has made a capital gain of ₹40000 on investment in an equity fund, Short Term Capital Gains Tax of 15% would be levied if s/he withdraws the amount within one year of investment. The payable tax would be ₹6000.

Also, if an investor has made a capital gain of ₹2 Lakh on investment in an equity fund, and withdraws the amount after 1 year of investment, Long Term Capital Gains Tax of 10% would be levied on ₹1 Lakh. ₹1 Lakh is exempted from taxation. The payable tax would be ₹10,000.

How to Invest in Large and Mid Cap Funds

You can invest in large and mid cap funds through either of the following ways-

• Offline mode of investing– If you are not confident of your knowledge, you may choose to invest through a broker. However, investing in a fund through a broker will make you eligible for investments through regular plans that offer different returns and varied expenses in investment. If you wish to invest in the fund independently, you must visit the nearest branch of the AMC of your fund. Don’t forget to carry the following documents-
  • Identity Proof (Aadhar Card)
  • Canceled cheque
  • Passport size photos (around 4-5)
  • PAN Card
  • KYC documents (for KYC verification)
• Online mode of investing– If you do not wish to add on to your expense of commissions or brokerage, you may visit online investment platforms such as Paisabazaar.com wherein you can choose from and compare more than 1,700 funds- all in one place, instead of following the long procedure of visiting the website of each AMC and then choosing from them. Here, you can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment