Investors today face a common dilemma: how to pursue meaningful wealth creation while controlling the risks associated with equity markets. A large and mid-cap fund is one instrument designed to address this challenge.
By investing in both stability-driven large-cap companies and growth-oriented mid-cap companies, this category of equity mutual funds offers a balanced path between safety and return potential.
For long-term investors seeking an option that provides diversification, scalability, and professional management, large and mid-cap funds can be particularly relevant.
What is a large and mid-cap fund?
According to the Securities and Exchange Board of India (SEBI) classification, a large and mid-cap fund is required to allocate at least 35% of its assets into large-cap companies. It must also invest at least 35% into mid-cap companies.
This mandatory allocation ensures that every fund in this category has exposure to the stability of industry leaders. It also allows participation in companies that are still expanding rapidly.
- Large-cap companies
These represent the top 100 listed companies by market capitalisation, usually comprising businesses like Reliance Industries Limited, Infosys Limited, or HDFC Bank Limited. They typically provide consistent growth and resilience during downturns.
- Mid-cap companies
These are ranked 101st to 250th by market capitalisation on the stock exchanges and generally include emerging leaders in niche industries. They tend to be more volatile but offer higher growth potential.
The combination of these two segments creates a built-in mechanism for balancing risk and returns.
Why investors look at large and mid-cap funds
Investors often seek a balance between stability and growth, and this is where large and mid-cap funds provide a compelling solution.
- Balanced risk-return profile
The defining advantage of this category is its ability to merge the reliability of large-caps with the dynamism of mid-caps. Large-caps cushion portfolios during turbulent periods, while mid-caps enhance return potential when the market is trending upwards.
- Diversification across market cycles
These funds diversify not only across market capitalisation but also across industries. This spread protects investors against the cyclicality of any single sector. For example, mid-cap defence stocks may face fluctuations due to government orders, but stability from large-cap financial or IT holdings helps offset those risks.
- Long-term wealth creation potential
Because of their allocation mandate, large and mid-cap funds tend to perform steadily across market cycles. Over a long-term horizon of five to seven years or more, many funds in this category have delivered double-digit compounded annual growth rates (CAGR). While past performance cannot be the sole criterion, it provides a useful perspective on return potential.
- Professional fund management
Active fund managers bring expertise in portfolio construction. They can tilt allocations more towards large-caps during uncertain phases and increase exposure to mid-caps when valuations are attractive. This dynamic approach ensures investors do not have to engage in timing the market.
How do large and mid-cap funds balance risk
These funds use a structured allocation model, reinforced by fund manager strategies, to ensure risks are controlled while returns remain competitive.
- Large-cap stability
The large-cap allocation ensures that the portfolio has a strong base of established businesses. These companies are generally leaders in their sectors, backed by strong governance, liquidity, and visibility of earnings. They reduce volatility, offering resilience in bear markets.
- Mid-cap growth
Mid-cap allocation provides the opportunity to capture growth at an earlier stage of business expansion. For instance, companies in manufacturing, infrastructure, or defence might fall under this category. While such stocks are volatile, their inclusion is what gives the fund an edge over pure large-cap funds during bullish periods.
- Sectoral diversification
The portfolio is usually spread across various industries. Exposure may include banking, consumer goods, information technology, infrastructure, and sometimes specialised sectors like defence or pharmaceuticals. This prevents concentration risk and supports balanced returns across economic cycles.
- Fund manager’s tactical Shifts
While SEBI mandates minimum allocations, fund managers have flexibility over the remaining portfolio portion. They can increase large-cap exposure to 50% or more during uncertain conditions or increase mid-cap exposure when growth signals are stronger. This tactical flexibility is an important balancing lever.
Considerations before investing
While large and mid-cap funds offer balance, investors should be aware of certain considerations:
- Volatility
Mid-cap companies are inherently more volatile. Sharp corrections in mid-cap indices may impact short-term performance.
- Liquidity
Some mid-cap companies may face liquidity issues, making entry or exit difficult in stressed markets.
- Fund overlap
Investors already holding dedicated large-cap or mid-cap funds should evaluate whether additional allocation here creates unnecessary duplication.
- Investment horizon
These funds are suited for long-term wealth creation. Investors with a less than five-year horizon may not fully benefit.
- Expense ratio
Since these are actively managed funds, expense ratios matter. Lower costs help improve net returns over time.
Taxation on large and mid-cap funds
Large and mid-cap funds are classified as equity mutual funds for taxation purposes:
- Short-term capital gains: Taxed at 20% plus cess if units are sold within one year.
- Long-term capital gains: Gains above ₹1 lakh per financial year are taxed at 12.5% if units are sold after one year.
For investors, this structure is relatively tax-efficient compared to certain debt-oriented mutual funds.
Who should invest in large and mid-cap funds?
Every investment category is best suited for a specific type of investor, and large and mid-cap funds are no exception.
- Moderate to high-risk investors: Those who can handle volatility in pursuit of long-term wealth creation.
- Investors seeking diversification: Ideal for individuals who want exposure to both stable and growing companies.
- Long-term planners: Those with investment horizons of at least five to seven years.
- Systematic investors: Investors who prefer discipline through a Systematic Investment Plan (SIP) benefit from rupee-cost averaging, reducing timing risk.
Practical example for investors
Imagine an investor with ₹50 lakhs to allocate. Instead of putting ₹25 lakhs in a pure large-cap fund and ₹25 lakhs in a mid-cap fund, the investor could put the full amount in a large and mid-cap fund. This simplifies management, ensures regulatory balance, and allows a professional manager to tactically shift weightings.
If the investor is bullish about specific sectors such as defence or infrastructure, this exposure may already be embedded within the fund’s mid-cap holdings. In contrast, a direct stock bet would carry significantly higher concentration risk.
Key benefits summarised
- Stability through large-cap allocation.
- Growth through mid-cap exposure.
- Diversification across companies and industries.
- Flexibility from active fund management.
- Efficiency in taxation and portfolio construction.
Take the next step towards smarter investing
A large and mid-cap fund provides an effective balance between risk and return, making it a strong candidate for core portfolio allocation. By combining the steady foundation of large-cap companies with the growth potential of mid-cap companies, this category enables investors to pursue consistent wealth creation while mitigating some of the inherent risks of equity investing.
For individuals considering equity mutual funds in India, this category offers a measured approach, suitable for both systematic investment plans and lumpsum contributions. The choice between these options depends on financial goals, investment horizon, and personal risk appetite.
In practice, investing becomes easier when supported by reliable platforms that allow access to both shares and mutual funds in one place. Platforms like Ventura provide this convenience, helping investors execute and manage their decisions efficiently while focusing on long-term wealth creation.