Large and Mid-Cap Funds are mutual funds that invest across the top 250 companies in India, offering exposure to both large and mid-cap stocks. According to SEBI guidelines, these funds must allocate at least 35% to large-cap stocks and another 35% to mid-cap stocks. The combination aims to balance the growth potential of mid-sized companies with the stability of large-cap companies.
By focusing on both growth and stability, Large and Mid-Cap Funds make an ideal choice for investors who seek market-beating returns with a lower risk profile than mid-cap-only funds.
Stability becomes more important than anything when you are investing for your goals. Even while picking stocks for Finology 30, we choose stocks that you can rely on for the long-term.
Large Cap Funds vs Large and Mid Cap Funds
After serving conservative investors with our large-cap index fund recommendation, we wanted to cater to those who want to achieve alpha and beat the market but do not want to take a big risk to achieve that alpha.
Giving priority to the safety first principle at Finology, we decided to 1st compare active large-cap mutual funds and large and mid-cap mutual funds categories.
Active large-cap funds have a mandate to make at least 80% of their investments in large-cap stocks. Although it looks conservative, the large-cap universe of 100 stocks restricts the fund manager from having a fair opportunity to showcase his stock-picking skills by building a portfolio less correlated to the benchmark it is comparing itself with. The minimum 80% exposure to large-cap stocks restricts the fund manager from generating a significant alpha as the balance of 20% exposure to mid or small-cap categories is very little to generate a meaningful excess return.
Our research found that large and mid-cap funds outperformed active large-cap funds on average by approximately 4.5% over 3 years, 5% over 5 years, and 2.6% over 7 years.
Hence, we prefer large and mid-cap funds for balanced performance and growth potential.
Read more in our article on Selecting the Best large-cap funds
Mid-Cap Funds vs Large and Mid-Cap Funds
Now that our analysis revealed clearly that, on average, large and mid-cap funds outperform large-cap funds, the next question that came to our mind was: If the mid-cap exposure is giving the large and mid-cap funds the outperformance, then why not go directly with a mid-cap fund instead?
Our research showed that mid-cap funds indeed outperformed large and mid-cap funds by around 3.6%, 5.1%, and 2.2% over the last 3, 5, and 7 years, respectively.
Selecting a fund purely based on past returns would have simplified the decision-making process. However, our approach emphasizes rational decision-making by factoring in multiple important considerations.
For instance, mid-cap funds must allocate at least 65% of their portfolio to mid-cap stocks, inherently making them riskier than large and mid-cap funds. Furthermore, mid-cap fund managers have a universe of only 150 mid-cap stocks to choose from, whereas large and mid-cap fund managers have access to a broader universe of 250 stocks.
In addition, the risk/reward ratio for mid-cap funds is not necessarily better than that of large-cap funds, as the additional risk associated with mid-caps may not justify the incremental returns for investors.
Therefore, after considering a balanced approach, we opted for a fund in the Large & Mid-Cap Fund category.
We have revealed our choice of large & mid-cap funds for 2025 in Recipe’s Free Reports section. Stay tuned!