Risks associated with large and mid cap funds

Large and mid cap funds invest in companies that are among the top 250 in the Indian stock exchanges by market capitalisations. Such funds aim to provide the potential for long-term capital appreciation along with risk mitigation by investing in stocks of well-established large cap companies as well as mid cap companies with the potential for growth.

While large and mid cap funds are considered relatively less risky than pure mid cap or small cap funds, they still fall under the high-risk category. Therefore, an investor needs to be aware of their risk appetite and also carry out a careful assessment of a scheme’s portfolio concentration, market cap mix, stock quality, historical performance and the fund manager’s reputation before investing.

This evaluation can help determine if the fund’s risk profile matches an investor’s own risk appetite and financial goals. Investing in a fund with mismatched risk can lead to an unsatisfactory and uncertain investing experience.

• Table of contents

1. What are large and mid cap funds?
2. Risk profile of large and mid cap funds
3. Evaluating the risk profile of a large and mid cap funds
4. Tips for mitigating risks in large and mid-cap funds

What are large and mid cap funds?

Large and mid cap funds invest at least 35% of their assets in large cap stocks and 35% in mid cap stocks. Large cap companies are the top 100 companies on the stock exchange based on market cap. Meanwhile, mid cap companies have a market cap are ranked 101 to 250 by market cap). Therefore, large and mid cap funds provide exposure to both relatively stable large companies and mid-sized firms with high growth potential.

Large and mid cap funds can be suitable for investors with a high risk-appetite who are looking for long-term wealth creation with lesser volatility as compared with pure mid cap or small cap fund. They can be used as the core equity holding in most portfolios.

Risk profile of large and mid cap funds

Though large and mid cap funds carry relatively lower risk than small cap funds, they are still prone to volatility. The following factors contribute to large and mid cap funds risk profile.

Market risk
Prices of large and mid cap stocks tend to fluctuate with overall market movements. During market downturns, their prices may decline significantly.

Liquidity risk
Mid cap stocks can be less liquid than large cap stocks. This can exacerbate volatility in fund NAVs during market swings.

Concentration risk
Funds may invest heavily in some sectors, making them vulnerable to sector-specific risks. Diversification across sectors is essential. It is therefore important to look at the scheme information document and asset allocation details of the portfolio before investing in a scheme.

Volatility
Mid cap stocks typically see higher volatility in their prices as compared to large cap stocks. A sharp fall in mid cap share prices can drag down the fund NAVs.

Poor stock selection
Some funds may invest in companies with weak fundamentals that are currently earning high returns but may not sustain good performance.

Evaluating the risk profile of a large and mid cap funds

Here are some parameters to assess the risk profile of a large and mid cap fund:

• Portfolio concentration: Check sector and stock concentration. Well diversified funds have a lower risk.
• Market capitalisation mix: Funds with higher mid cap allocation carry higher risk. Choose funds with a prudent mix of large and mid cap stocks if risk mitigation is your priority.
• Portfolio quality: Analyse the financial health and earnings growth of portfolio companies.
• Volatility: Funds with smoother returns have lower volatility risk.
• Fund manager's track record: Experience in managing market cycles is important.
• Costs: A high expense ratio eats into fund returns over the long term.

Tips for mitigating risks in large and mid-cap funds

Bajaj Finserv Large and Mid Cap Fund can be a suitable choice for investors looking for a diversified large and mid cap fund. The fund adopts a prudent investment approach focusing on high-quality stocks across market caps and effectively managing risks for investors.

FAQs

How can large and mid cap funds reduce their portfolio risk?
These funds can mitigate risk by maintaining adequate diversification, investing in quality stocks with strong fundamentals across sectors, capping exposure to high-risk stocks and employing prudent risk management.

How do large and mid cap funds differ from large cap funds?
Large and mid cap funds invest in both large and mid cap stocks, whereas large cap funds focus predominantly on large cap stocks. Large and mid cap funds can thus aim to combine the relative stability of large cap companies with the higher growth potential of mid cap firms.

How does large and mid cap fund help in diversification and growth?
Large and mid cap fund investment help in diversification and growth by investing in a mix of stocks from companies in different positions on the growth spectrum. These funds can also diversify your exposure across market sectors.

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.