5 things to know before investing in large & mid cap mutual funds
Large & mid cap schemes may be officially a new category after the recategorisation of mutual funds by Sebi. However, many multi cap mutual funds used to follow a similar investment strategy to deploy their funds earlier.
Updated: Dec 10, 2019, 03.28 PM IST
Many investors, especially the new ones, are picking large & mid cap mutual fund schemes for their potential to offer superior returns. Popular schemes like Mirae Asset Emerging Bluechip Fund is helping the category immensely. However, investors should first try to understand the category better.
- What is a large & mid cap mutual fund scheme?
According to Sebi mandate, large & mid cap schemes are mandate to invest in at least 35% of the corpus in large cap mutual stocks and 35% in mid cap stocks. Large cap stocks are defined as top 100 stocks by market capitalisation, while mid cap stocks are defined as 101-250 stocks by market capitalisation.
- Why are these schemes a bit tricky to understand?
Many investors choose these schemes for some mid cap exposure. But many of them are unaware that the scheme is mandated to invest a minimum 35% of the corpus in mid cap stocks. Mid cap stocks are risky and they can also be volatile. You should take an exposure to them only if you have a very high tolerance for risk and volatility. Sticking to the scheme is extremely important to make the extra returns over a long period. If you panic and abandon your investments during a bad phase in the market, you lose an opportunity to create wealth.
- But erstwhile multi cap schemes used to be run like these funds?
Yes, many multi cap schemes used to invest in a combination of large and mid cap stocks. However, they used to switch between large and mid cap stocks based on the market conditions and outlook of the fund manager. Now, the scheme must stay invested at least the mandated limit of 35% in mid cap stocks. This makes these schemes extra risky.
- Does that mean one should stay away from large & mid cap schemes?
Ideally, you should wait for these schemes to build a performance record of at least five years, say some mutual fund advisors. They have been around only for two years. Also, one should see the investment patter of these schemes over a long period to understand how the fund houses want to position the category.
- Okay, I figured out the risk part. Now, can I invest?
Yes, you can invest in large & mid cap schemes if you understand the extra risk involved in them. If you are a new investor, you may give them a miss, say mutual fund advisors. Multi cap mutual fund schemes might be a better way to take meaningful exposure to mid caps, adds advisors.
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