5 Common Myths About Large and Mid Cap Funds - Busted!

At first glance, large and mid cap funds might sound like a compromise — part big, part small. But the reality is more strategic. These funds are required to maintain a thoughtful mix of both large cap and mid cap companies, relative blending the stability of established businesses with the growth potential of emerging ones. Still, many investors carry or incomplete perceptions about this category.

Let’s clear these mutual fund myths for people considering investing in large and mid-cap funds.

Table of contents

• Why large and mid-cap funds are popular among investors
• Myth 1: Large and mid-cap funds are too risky
• Myth 2: These funds don’t offer adequate return potential
• Myth 3: Only experienced investors should invest in large and mid-cap funds
• Myth 4: Mid cap exposure in these funds makes them unstable
• Myth 5: SIPs don’t work well with large and mid cap funds
• How these funds actually work: Facts vs misconceptions
• Tips to invest wisely in large and mid cap funds

Why large and mid-cap funds are popular among investors

• Built in diversification: Mandatory exposure to both large and mid segments spreads company specific risk.
• More balanced risk-return profile than pure large and pure mid cap funds: The presence of large caps reduces overall portfolio volatility, while mid caps can add higher growth potential in some market conditions.
• SIP-friendly: Investing in SIPs can mitigate market timing risk and aid long-term growth potential through compounding.
• Liquidity edge: The mandatory large cap sleeve keeps a significant portion of the portfolio in heavily traded names, so funds have potentially more wiggle room to meet redemptions compared with pure mid cap strategies, which may face liquidity squeezes in volatile markets.

Myth 1: Large and mid-cap funds are too risky

Reality: All equity schemes are typically classified as Very High Risk in their Riskometers.

This is because equities by nature tend to be volatile. However, very high risk does not necessarily mean unmanaged risk. Since 35% of the portfolio stays anchored in large caps, drawdowns are generally shallower than pure mid cap or small cap funds during market stress. A quick data check underscores the point: during the Covid 19 crash (Feb to Mar 2020), the Nifty LargeMidcap 250 TRI fell 35%, while the Nifty Midcap 150 dived 43% and the Nifty Smallcap 250 slumped 50%. *Past performance may or may not be sustained in future.

Myth 2: These funds don’t offer adequate return potential

Reality: Large and mid cap funds combine stability with growth. The mid cap portion of the portfolio offers exposure to companies with higher growth potential, often in their scaling-up phase, while the large cap allocation brings in relative stability and proven business models.

Historically, these funds have tended to outperform pure large cap funds over long investment horizons, especially in bull phases or economic recovery cycles.

Past performance may or may not be sustained in future

Myth 3: Only experienced investors should invest in large and mid-cap funds

Reality: Risk tolerance matters more than experience. With disciplined SIPs, even first-time investors can steadily average out cost. Choosing a suitable investment amount and horizon can matter more than financial expertise.

For new investors, a simple asset allocation rule like “100 minus age in equity” can help create a long-term framework. Large and mid cap funds can fit into the equity portion of your portfolio, while you keep short-term needs in more liquid or fixed-income instruments.

This approach removes guesswork, helping even newer investors stay invested without reacting emotionally to market noise.

Myth 4: Mid cap exposure in these funds makes them unstable

Reality: Mid caps can be volatile, but their weight is structurally capped between 35% and 65% of the portfolio. Simultaneously, a minimum 35% large cap cushion is always present. This structure prevents the portfolio from becoming too skewed in either direction. For instance, fund managers cannot simply shift to 80–90% mid caps in a bull run. Moreover, during turbulent phases, the fund manager has flexibility to increase the large cap allocation up to 65%, giving the fund a natural rebalancing mechanism in volatile markets.

Plus, with monthly portfolio disclosures, investors can monitor the fund’s mid cap positioning. If a fund repeatedly pushes mid cap exposure toward the 65% ceiling — particularly in frothy markets — investors can choose to exit or reallocate based on their own comfort.

Read Also: Difference Between Large Cap, Mid Cap, and Small Cap Funds

Myth 5: SIPs don’t work well with large and mid cap funds

Reality: SIPs can be a suitable way to invest in volatile assets because rupee-cost averaging buys more units when prices dip. Over a 5-10 year period, SIPs in large and mid cap funds can enable a disciplined path to capital appreciation — without the pressure of timing the market.

How these funds actually work: Facts vs misconceptions

Let us look at some of the myths about large and mid-cap funds and the facts behind them:

Tips to invest wisely in large and mid cap funds

• Match horizon: Aim for ≥ 5 years; shorter goals need lower risk options.
• Use SIPs: Start small and increase annually to smooth market swings.
• Stick to asset allocation: Limit equity exposure overall instead of timing exits.
• Watch exit loads and tax impact: Most equity funds levy a 1% exit load if redeemed within a year, and gains held over 12 months attract 12.5% long term capital gains tax beyond Rs. 1.25 lakh in a financial year. Factor both when planning liquidity.

Conclusion

Large and mid cap mutual funds combine breadth and long-term growth potential, but myths often scare off new investors. Understanding the SEBI mandated structure, large and mid cap fund return potential, and SIP data shows that the category may be suitable for patient long-term investors seeking balanced equity exposure. Stay disciplined, diversify, and let time, not headlines, do the heavy lifting.

Read Also: Retirement Planning with Large Cap & Mid Cap Fund

FAQs:

Are large and mid-cap funds safe for long-term investment?

They carry “Very High” Risk-o-Meter tags so expect fluctuations. An investment horizon of at least five to seven years or more is advisable to potentially ride out short-term volatility.

Can beginners invest in large and mid-cap mutual funds?

Yes, beginners can invest in such funds provided they have a long investment horizon and can tolerate higher volatility in the short term. SIPs can be a suitable way to invest in such funds if you do not want to commit a large amount upfront and want to mitigate the impact of volatility or market timing risk.

Do large and mid-cap funds offer better returns than large cap funds?

Large and mid cap funds have the potential to offer better returns than large cap funds, especially in bull phases. However, returns are not guaranteed and depend on market conditions.

Is it true that mid cap exposure increases risk in these funds?

Mid caps add volatility, but SEBI caps mid cap weight to 35 to 65% while enforcing at least 35% exposure to large caps, thus tempering extremes.

How should I select the best large and mid-cap fund for my goals?

To find a suitable fund, compare expense ratios, consistency against the benchmark, and suitability within your overall asset allocation rather than chasing last year’s top performer.