The best of both worlds is how the tagline should read for large and midcap equity funds. True to mandate, this relatively new category of funds gives investors the opportunity to participate in the growth of midcap companies which have the potential to become tomorrow’s bluechip companies and are well-positioned to discover tomorrow's potential today. At the same time, large and midcap funds take the advantage of the safety and stability of the present large cap companies. There are over two dozen funds which manage over Rs 1.27 lakh crore assets. Over 75 lakh investor accounts exist in large and midcap funds, and the unique proposition offered by them makes an interesting play.
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Getting the Basics Right
As per definition, large cap stocks are the top 100 (in terms of market cap) of the Indian listed stock universe. Mid cap stocks are the 101st to 250th stocks in the pecking order. Large and midcap equity funds invest at least 35 per cent of their assets each in large cap stocks and midcap stocks. The maximum allocation can be 65 per cent. The balance of assets can be deployed in other market cap and asset classes segment at fund manager’s discretion.
Why is this Category Attractive?
Large cap stocks are comparatively less risky as prices tend to less volatile. This lower risk and volatility perception is compared to that of midcap or small cap stocks. Do note mid cap stocks may be riskier than large cap stocks but they also have the ability to deliver higher returns in the long term. This is because large caps stocks may be mature businesses but midcaps are usually growth oriented businesses.
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Most large and midcap equity funds' investment approach is bottom-up. Some follow value investing, growth investing or blended style of investing. This combination places such funds at a unique vantage point, not available in any other equity mutual fund category.
Large and midcap funds are centered upon investment philosophies of selecting businesses based on large market opportunity, sustainable competitive moats, and high return ratios. They focus on buying businesses with good corporate governance and robust balance sheets. Large and midcap funds, ideal for retail investors, build portfolios with high margin of safety and emphasise on diversified portfolio with active monitoring stance.
Performance
The returns of large and midcap equity funds is a testament to the advantages of the offering. In the year to date period, large and midcap funds have done better than multicap, midcap and large cap funds. In the longer tenure of say, 3 years, large and midcap funds have delivered 16.4 per cent CAGR (as on Feb. 3, 2023) compared to 14.95 per cent by large cap funds and 14.54 per cent by flexi cap funds. The trend is maintained in the 10-year time horizon as well, where large and midcap funds have given average return of 14.7 per cent CAGR versus 13.2 per cent CAGR by flexicap funds and 12.2 per cent CAGR by large cap funds.
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The risk profile of large and midcap equity funds is usually moderately high. Hence, investors who have moderately high risk appetite should invest in these funds. The suggested investment tenure is 3– 5 years or more.
Taxation
Capital gains arising out of long term investments (held for more than 12 months) are tax free up to Rs 1 lakh in a financial year for large and midcap equity funds. Long term capital gain over Rs 1 lakh in a financial year is taxed at 10 per cent for such funds. Short term (investments held for less than 12 months) capital gains are taxed at 15 per cent.
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Takeaways
Notwithstanding the market cap limits, the fund managers in large and midcap have enough flexibility in identifying and responding to market opportunities and potential to deliver alpha to investors. For investors, they get the advantage of investing in large and midcap stocks through a single transparent and liquid portfolio. So, investors can invest in this type of offering to meet their medium to long term investment goals. This is on account of stability of large cap holdings and the agility of midcaps which can create wealth over long term.
