What are Large and Mid Cap Funds?

Large and mid cap funds are a category of mutual funds that invest in a mix of large and mid-sized companies in terms of market capitalisation. Such funds seek to balance the relative stability of large caps with the growth potential of mid caps.

Unlike pure large cap funds, which invest predominantly in companies with large market capitalisations, or mid cap funds, which focus on medium-sized companies, large and mid cap funds can potentially combine the benefits of both.

Table of Contents

• Investment Strategy
• Growth Potential
• Diversification
• Risk and Returns
• Suitability
• Factors influencing the performance of large and mid-cap funds
• How to choose a suitable fund based on performance

Investment Strategy

Large cap companies are typically industry leaders with stable returns, while mid-cap companies are those in the process of expanding their market presence, often offering higher growth potential. This unique investment strategy allows large and mid cap funds to seek to strike a balance between relative stability and long term growth potential.

Growth Potential

Large and mid cap funds have a higher growth potential than large cap funds because the mid cap section of their portfolio provides room for expansion. Moreover, they can offer more relative stability than pure mid cap funds, owing to the large cap component.

Diversification

Diversification is one of the key advantages of large and mid cap funds. Investors gain exposure to a broad spectrum of industries and company sizes which can mitigate both the risk and the possible limitations associated with investing in a single company, sector, or market capitalisation.

Risk and Returns

While large and mid cap funds offer the potential for higher returns compared to pure large-cap funds, they also come with higher risk due to the inclusion of mid-cap stocks. A long investment horizon is typically recommended for equity funds because markets can be volatile in the short term but tend to stabilise over longer horizons.

Market Exposure and Liquidity

These funds provide broad market exposure, including to emerging sectors and established industries. They also ensure liquidity, making it easier for investors to enter or exit the fund based on their financial goals and market conditions.

Suitability

Large and mid cap funds are suited for investors looking for a blend of long term growth potential and relative stability. They are ideal for those with a high risk appetite looking for capital appreciation over the long term.

Factors influencing the performance of large and mid-cap funds

Several factors can significantly influence the performance of large and mid-cap funds:

• Economic growth: A growing economy typically benefits both large and mid-cap companies by driving consumer spending, corporate earnings, and market optimism.
• Interest rates: Rising rates can negatively affect both types of stocks, especially those with high growth expectations and valuations.
• Inflation: High inflation can reduce corporate profits and increase borrowing costs, negatively impacting company performance.
• Market cycles: Stock market trends, including bull and bear markets, can strongly affect the performance of both large-cap and mid-cap stocks.
• Investor sentiment: Changes in investor sentiment—such as fear, greed, and risk aversion—can lead to significant market fluctuations.
• Sector performance: The performance of individual sectors, such as technology, healthcare, and energy, can significantly impact fund returns.
• Financial performance: Revenue growth, profitability, and financial health of companies within the fund can greatly influence returns.
• Competitive landscape: Industry competition, technological changes, and shifts in consumer preferences can impact company performance and the fund's success.
• Management quality: Effective leadership is essential in guiding companies through challenges and making decisions that drive long-term growth.
• Investment strategy: The fund manager's approach to stock selection, risk management, and overall investment philosophy can significantly affect performance.
• Portfolio construction: The fund's sector allocation, diversification, and stock weighting impact both risk and return potential.
• Portfolio construction: The fund's sector allocation, diversification, and stock weighting impact both risk and return potential.
• Fund expenses: High expense ratios can reduce overall returns over time.

How to choose a suitable fund based on performance

Key factors to consider when choosing the right fund based on performance:

• Past performance: Analyse the fund's historical returns over 3, 5, and 10 years. Identify funds that have shown consistent performance. Keep in mind, past performance does not guarantee future results.
• Benchmark: Compare the fund's performance to that of its benchmark index.
• Expense ratio: A lower expense ratio can improve long-term net returns by reducing costs.
• Portfolio holdings: Review the fund’s holdings to understand its strategy and risk profile.

FAQs

How often should I evaluate the performance of my large and mid cap funds?

Investors should evaluate the performance of their large and mid cap funds at least once a year. However, it is recommended that investors evaluate their funds more frequently, such as quarterly or semi-annually.

What benchmarks should I use to compare the returns of my funds?

Investors can use broader benchmarks such as the Nifty 50, Nifty Midcap 100, or BSE 500 or more specific indices such as BSE Large MidCap or Nifty Large MidCap 250 to compare the returns of their funds.

How do I determine if a fund's performance is above or below average?

Comparing a fund’s performance against peer funds or benchmark indices can provide a standard for comparison and help investors determine whether their investment is overperforming or underperforming.

How do you analyse fund performance?

To evaluate mutual funds, compare returns to benchmarks and peers, assess risk-adjusted returns (Sharpe, Sortino ratios), and analyze the expense ratio. Consider the fund manager's experience and portfolio allocation. Evaluate performance across market cycles and ensure the fund aligns with your investment goals and risk tolerance.

Why is it important to evaluate the performance of large and mid-cap funds?

Evaluating large and mid-cap funds is vital for informed investment decisions, monitoring progress, and assessing risk. Regular evaluations enhance transparency, accountability, and alignment with financial goals.

How do you calculate the returns of large and mid-cap funds?

To calculate absolute returns, use the formula: (Current NAV−Initial NAV)/Initial NAV×100. However, this formula does not take into account the impact of time on your investment.

It is easier to look at historical performance data compiled by official sources. You can consider the Compound Annual Growth Rate (CAGR) as well as benchmark and peer comparisons and risk-adjusted returns (Sharpe and Sortino ratios). XIRR is important for calculating returns on SIPs.

What factors influence the performance of large and mid-cap funds?

The performance of large and mid-cap funds is influenced by factors such as macroeconomic conditions (economic growth, interest rates, inflation), industry trends (technology, competition, regulations), company-specific factors (financial performance, management, competitive advantage), market sentiment, and the expertise of the fund manager in stock selection and portfolio construction.

How can I compare the performance of large and mid-cap funds with benchmarks?

To compare large and mid-cap fund performance, check the performance of your scheme and then look at the benchmark returns for the same period under consideration. The scheme benchmark will be mentioned in all essential scheme-related documents. For example, for large and mid cap funds, the benchmark could be Nifty Large Midcap 250 TRI.

You can also analyze returns over different periods and calculate the alpha to measure outperformance. Consider time horizons, market cycles, and expense ratios for a comprehensive evaluation of performance.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.