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Is it good to invest in large cap mutual funds?

Large cap mutual funds are a type of equity mutual funds that invest majorly in large cap companies. They are considered as one of the safer options among equity mutual funds. Financial experts suggest that large cap mutual funds are a must have in one’s portfolio.

Large cap mutual funds invest in well-established and mature companies. They are financially sound and have a good brand name. Additionally, they are less volatile to market and economic cycles, making them quite stable. Largecap companies are companies that have reached the peak of their growth. Hence, these companies distribute more dividends than mid and small cap companies. Moreover, during a bearish market phase, these companies are less affected than mid and smallcap companies.

Investors looking for equity exposure can start their investing journey with largecap mutual funds as they are considered safer than mid and smallcap mutual funds.

What are large cap and mid cap mutual funds?

A large cap mutual fund invests majorly in large cap companies. Large cap companies are those that rank 1-100 in terms of market capitalization. They are well established companies and are often considered as pillars of the industry. These companies are well known, stable and financially sound. Also, they have the capacity to withstand market volatility better than others.

These companies have reached their economies of scale and have stable growth rates. They generally pay more dividends than other companies and are highly liquid in terms of trading. Large cap mutual funds are considered as one of the safest options among equity mutual funds. Beginners who want exposure to equity can start by investing in them.

A mid cap mutual fund invests majorly in midcap companies. Midcap companies are those that rank 101-250 in terms of market capitalization. These companies are emerging to be large cap companies. In investing terms, they strike a decent balance between risk and return. They have higher growth potential than large cap companies and lesser risk than smallcap companies. However, they are more volatile to market conditions than largecap companies.

Midcap companies cater to emerging markets and hence have a platform to grow into large cap companies. However, the tables may turn too. Mid cap companies are underfollowed, under researched and undervalued. Hence, good mid cap mutual funds can give investors higher returns. They are highly volatile, and therefore investors are suggested to stay invested in these funds for longer horizons.

Who should invest in mid cap funds?

Midcap funds aim to the right balance between risk and return. The funds aim at capital appreciation and invest in companies that have the potential to grow into largecap companies. However, the tables may turn too. Mid cap mutual funds have a higher potential to grow than large cap mutual funds. And they are less riskier than small cap mutual funds. However, they are quite sensitive to market movements. One has to invest mid cap mutual funds for the long term to reap maximum benefits.

Hence investors who are willing to invest for a long term and can overlook short term market fluctuations can invest in these funds. Moreover, investors seeking higher growth and are willing to absorb more volatility for better returns can invest in mid cap mutual funds.

How do I choose a mid cap mutual fund?

Choosing a mid cap mutual fund primarily depends on the following:

Investment horizon

Mid cap mutual funds are suitable for long term investments. Therefore, investors with an investment horizon of at least five years to ten years should invest in mid cap funds. Equity investments are highly volatile, and in the short term, the returns are subject to fluctuations. Hence, investing for the long term will help in averaging out the volatility and generating significant returns.

Financial goal

Financial goals play an important role in choosing mid cap funds. Midcap mutual funds best suit long term financial goals like a child’s education or building a house (after ten years). For short term financial goals like getting a car or going on a vacation, mid cap funds, or any equity fund, aren’t suitable.

Historical performance

Though past performance doesn’t indicate future returns, it is a good indicator to study the fund’s performance. Historical performance helps in understanding the fund’s ability to perform in different market conditions. Identifying and investing in funds that have managed to generate significant returns even during a downturn is the best strategy. Hence studying the performance of a fund and comparing them with its peers will help in shortlisting the best suitable midcap fund. 

Expense ratio

It is important to understand the costs involved with investing. The fund house or the AMC charge a certain fee for managing the fund. Additionally, there are commissions to distributors or advisors or brokers. Therefore, to generate significant returns, one should identify funds with low expense ratio.

Fund house and Fund manager

The reputation of the fund house and the experience of the fund manager plays a vital role in its performance. Most commonly, a reputed fund house is perceived to have the capacity to offer good funds. At the same time, they hire the best fund managers to manage their funds.

The fund manager and their research team’s experience plays an important role in the fund’s performance. An experienced manager and team will have a better view of the markets and make more informed investment decisions. Hence these factors are also important while selecting a mid cap mutual fund to invest.

What is a mid cap in mutual fund?

Midcap is a category in equity mutual funds. These mutual funds are mandated to invest at least 65% of the assets in mid cap companies. Mid cap companies are those that rank from 101 to 250 in terms of market capitalization. These companies are often undervalued and can be excellent picks to earn higher returns. These mutual funds have stocks that are highly responsive to opportunity and change. These funds are highly vulnerable to business cycles. They are riskier than large cap mutual funds but less risky than small cap mutual funds.

Midcap companies operate in a niche and emerging markets; this allows the investor to diversify their portfolio. Mid cap funds are liquid, and investors can sell the units of the fund whenever they want. These funds have the potential to give higher returns in the long term (7+ years).

Is it a good time to invest in small cap funds?

Smallcap mutual funds invest the majority of their assets in small cap companies. They are extremely volatile and fluctuate based on market conditions. Hence investors who are willing to invest in them have to stay invested for a longer horizon (7+ years).

Since small cap funds best suit the long term horizon, there is no best time to invest in them. Investing in mutual funds through SIP eliminates the need for timing the market. Hence there is no good time to invest in these mutual funds. One can invest in them through SIP and eliminate the need for timing the market. However, one has to remember that they can reap higher returns only in the long run.

Published on November 9, 2020