How to diversify your investment portfolio with large and mid-cap funds?
Portfolio diversification is one of the first things you would hear about when you start investing. Diversification essentially means investing in different stocks and asset classes so that you spread the risk. It is as simple as saying that you are not putting all your eggs in one basket. This is why mutual funds offer a higher level of diversification than a direct investment in stocks, bonds and so on.
However, within the mutual fund category, you need to diversify more. You can achieve this by investing in large and mid-cap funds.
- Table of contents
- What are large and mid-cap funds?
- How to build a diversified portfolio with large and mid-cap funds?
- FAQ
What are large and mid-cap funds?
Mutual fund schemes that invest in equity and equity-related instruments of the top 250 companies, in terms of market capitalisation, are called Large and Mid-cap Funds. According to the Securities and Exchange Board of India (SEBI) mandate, a fund must allocate at least 35% of its total assets in large-cap and 35% in mid-cap companies to be labelled as a Large and Mid-cap Fund. Please note that the top 100 companies, in terms of market cap, comprise the large-cap companies and the top 101 to 250 companies comprise the mid-cap companies.
How to build a diversified portfolio with large and mid-cap funds?
Here are a few tips on how to build an investment portfolio with large and mid-cap funds:
Classic diversified portfolio:
A 60-40 ratio of equity and debt investments works for most investors who are looking to create wealth in the long term. You can add asset classes like real estate, forex investments, etc. based on your investment goals. Investing a chunk in large and mid-cap funds can help you achieve your financial goals since this category offers a relatively higher return potential over long term.
Aggressive portfolio: If you are a seasoned investor or a young investor who can bear a higher risk, you can build a diversified portfolio that focuses on aggressive growth. You can invest in multiple equity funds like large and mid-cap funds, small-cap funds, and flexi-cap funds in addition to debt funds and other relatively stable asset classes.
Investing in large and mid-cap funds can help you get the relative stability of investing in large-cap companies and the higher growth potential of investing in mid-cap companies. This approach is a relatively stable option than investing in pure large-cap funds where the potential of growth is lower or in pure mid-cap funds where the risk is higher.
FAQs:
Large and mid-cap funds vs mid-cap funds: which one to choose?
A: Mid-cap funds invest at least 65% of their assets in equity and equity-related instruments of mid-cap companies, i.e. top 101-250 companies in terms of market capitalisation. These are mid-size fast-growing companies that have been around for only a few years. They offer a relatively higher return potential but at a higher risk level than large-cap funds and large and mid-cap funds. Large and mid-cap funds, on the other hand, offer relatively stable returns at a lower risk than pure mid-cap funds.
What are the different types of mutual funds based on market capitalisation?
A: Here are six main types of market cap mutual funds investing in India:
- Large-cap funds: They invest at least 80% of their assets in large-cap companies (Rank 1 - 100).
- Mid-cap funds: They invest at least 65% of their assets in mid-cap companies (Rank 101 - 250).
- Small-cap funds: They invest at least 65% of their assets in mid-cap companies (Rank 251 onwards).
- Large and mid-cap funds: They invest at least 35% of their assets each in large-cap and mid-cap companies.
- Multi-cap funds: They invest at least 25% of their assets each in large-cap, mid-cap, and small-cap companies.
- Flexi-cap funds: They invest their assets in companies of any size with no minimum holding requirements.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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