Mid Cap vs Large Cap Funds: All You Need to Know5 min read
Various types of investment options are available in the market and are chosen based on the investors’ risk profile and their financial goals. For long-term growth opportunities with inflation-beating returns, there are two popular mutual fund categories – large cap and mid cap funds. As the name suggests, these types of funds are categorized based on the market capitalization of the underlying companies.
If you have plans to start investing in these types of funds, you must develop an in-depth understanding of how they work and can benefit you in the long run. Let’s get into the basics.
What is a Mid Cap Fund?
A mid cap mutual fund scheme is a type of fund formulated by different AMCs that invests a minimum of 65% of the total assets in the equities/stocks or equity-related securities of mid cap companies. If classified in terms of market capitalisation, these companies lie between the 101th and 250th largest companies.
Mid cap fund investments are a perfect combination of risk and returns. It is because the underlying companies have significant stability and responsiveness to market volatility. It is expected that the mid cap funds can outperform various large cap funds, especially when the market is bullish. This is what gives them the potential to become large companies over time.
What is a Large Cap Fund?
Contrary to mid cap funds, large cap mutual funds invest a minimum 80% of their total assets in the stocks of the top hundred companies as per market capitalization (also known as large cap companies). They are also known as bluechip funds in analogy to the blue chip that holds the highest value in the game of poker.
Investments in large cap funds are meant to bring stability to the investors’ portfolio by minimizing the risk involved to a certain extent.
Comparison Between Mid Cap and Large Cap Funds at a Glance
| Variable | Large Cap Funds | Mid Cap Funds |
| As per market capitalisation | Top 100 companies | Companies falling between 101 and 250 position |
| Portfolio composition | Minimum 80% of total assets invested in equities of large cap companies | Minimum 65% of total assets invested in equities of mid cap companies |
| Degree of risk | Moderate | High |
| Expected returns | Moderate | Comparatively higher than large cap funds |
| Liquidity | High | High |
| Investment horizon advisable | Up to five years at least | Up to seven years at least |
| Who should invest | Risk-averse investors | Investors having high-risk appetite |
| Volatility | Low | High |
Why Should You Invest in Mid Cap Index Funds? –
Most investors aim to spread their capital across different asset classes – equity, debt, etc., to minimise the risk involved. The diversification of your investment portfolio to include companies from different sectors and market capitalisation can be challenging. It is where index funds come into the picture.
Index mutual funds invest in stocks that imitate different stock market indices, like BSE Sensex and NSE Nifty. These funds are passively managed and the fund manager chooses to invest in the same securities present in the chosen index and in the same proportion. Also, the funds endeavour to offer comparable returns related to the index being tracked.
Here’s why you should invest in mid cap index funds:
1. Aggressive Investment Preferences
As mid-cap funds invest predominantly in midsize company’s stocks, they are highly suitable to you, assuming you are an aggressive investor. Since you are willing to take comparatively higher risk to receive market-beating returns, you believe in the potential of the underlying companies to become large cap over time.
Keep in mind that these funds are also very volatile along with having the potential to deliver higher returns. In case of any economic downturn, they may undergo price corrections.
2. Long Term Investment Horizon
With high-risk investments, it is crucial for investors to have patience and plan to stay invested over the long term to receive good returns. You can choose to invest in these types of index funds if you have planned a long-term investment horizon.
Many experts suggest having an investment horizon of at least seven year in mid cap funds to receive good returns. If you invest in them for the short term, you will most likely face the impact of market volatility.
3. Financial Goal Planning
Financial planning is quite crucial to achieving various goals you have in mind. Whether it is about buying a new home or planning for the kid’s marriage ten-fifteen years down the line, you can plan for them by investing in mid-cap funds as per your risk-taking capacity.
These funds allow you to invest in companies having the potential to grow comparatively faster than many other established organisations. You can also look at the market capitalisation of the overall investment portfolio to plan things in a better way.
The Bottom Line
You can think of the year 2021 as the year of mid-cap companies. Although there can be an occasional market drop, the overall trend is quite positive. If you want to start investing in index funds, you can begin exploring more the latest offering – ICICI Prudential Midcap 150 Index Fund on Paytm Money.
ICICI Prudential Midcap 150 Index Fund
Disclaimer –
Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Such representations are not indicative of future results. Paytm Money Ltd SEBI Reg No. INA100009859 Regd Office: 136, 1st Floor, Devika Tower, Nehru Place, Delhi – 110019. The NFO offering is non Exchange traded products and Paytm Money Ltd (PML) is acting as an agent for distributing the same. Please note all disputes with respect to the distribution activity, would not have access to the Exchange investor redressal forum or Arbitration mechanism. This information is purely based on publicly available data (Data Source: Scheme Information Document, https://www.icicipruamc.com/) and in no way to be considered as advice or recommendation.
