How can large and mid-cap help in long-term wealth building?

A large and mid-cap fund invests at least 35% of its total assets each in equity and equity-related instruments of large-cap and mid-companies. It offers a relatively better return potential and better portfolio diversification than many other types of mutual funds. The fund managers of a large and mid-cap fund can create a strong and diversified mutual fund portfolio by picking stocks from the top-performing 250 companies on the stock market to deliver reasonable returns to the investors. Moreover, with a longer investment horizon, you can potentially generate wealth and progress steadily towards meeting your financial goals.

Read on to understand the importance of large and mid-cap funds in long-term wealth creation.

• Table of contents

1. How to build long-term wealth with large and mid-cap funds?
2. Option 1: Make a lumpsum investment
3. Option 2: Start a systematic investment plan (SIP)
4. Importance of diversification
5. FAQ

How to build long-term wealth with large and mid-cap funds?

If you want to create wealth with your mutual fund investment, you need to start tapping into the power of compounding. You can build wealth with large and mid-cap funds in the long term with two options:

Option 1: Make a lumpsum investment

You can make a lumpsum investment in a large and mid-cap fund and let it grow over a long investment horizon. In the first year, your initial investment can bring returns, subject to market movement. The subsequent returns will be added to this next year and so on to generate reasonable growth, thanks to the compounding effect. Over the long term, this would eventually create wealth for you. For instance, a lumpsum investment of Rs. 1 lakh with a rate of return of 12% compounded annually can potentially grow into Rs. 17 lakh in 25 years. (Past performance may or may not be sustained in future)

Option 2: Start a systematic investment plan (SIP)

Many people do not have a large sum of money to invest immediately. They need not lose heart since they can also make mutual fund investments with a sum of Rs. 500 or more. They can invest this sum on a monthly, quarterly, semi-annual, or annual basis in a large and mid-cap fund. Another advantage of investing in a SIP is that you buy mutual fund units at both high and low points in the market which averages the cost over a long term. This is known as rupee cost averaging. Therefore, by making small but regular investments over a long period and reinvesting the returns, you can potentially create wealth.

Importance of diversification

Large and mid-cap funds offer the dynamic combination of the relative stability of large-cap funds and the aggressive growth potential of mid-cap funds. The innate portfolio diversification offered by large and mid-cap funds makes them a suitable investment instruments available to investors. Fund managers can also cherry-pick stocks from the top 250 companies to create a strong portfolio and optimise the return potential over long term. You can invest a lumpsum or start an SIP based on your preference.

FAQs:

Who should consider investing in large and mid-cap funds?
A: Investors who have a moderate-to-high risk appetite and a long investment horizon can consider investing in large and mid-cap funds. First-time investors and young investors can also benefit from the role of large and mid-cap funds in long-term wealth creation.

What are the benefits of investing in large and mid-cap funds?
A: There are plenty of advantages to investing in large and mid-cap funds. First, they offer a relatively better return potential than pure large-cap funds and relatively lower volatility than pure mid-cap funds. Second, the fund managers have a pool of top-performing 250 stocks to choose from to create a strong and diversified mutual fund portfolio. Third, they offer portfolio diversification.

How are large and mid-cap funds taxed?
A: Large and mid-cap funds invest at least 35% of their total assets each in equity and equity-related instruments of large-cap and mid-cap companies. Since they have a minimum 70% equity allocation at any time, these funds are treated as equity funds for taxation purposes. Thus, capital gains on large and mid-cap funds for a holding period of less than 1 year are taxed as Short-term Capital Gains (STCG) at a flat rate of 15%. For a holding period above 1 year, the capital gains are taxed as Long-term Capital Gains (LTCG). LTCGs are exempt from tax up to Rs. 1 lakh and taxed at 10% thereafter.

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.