Large-cap vs. small & mid-cap: Which equity funds are hidden gems?

Equity mutual funds have become extremely popular in India in the year 2023; with reports indicating that the total Assets Under Management (AUM) of the Indian mutual fund industry have soared to over ₹46 lakh crore. This growth signifies a paradigm shift in the way Indians approach investing. Large-cap, mid-cap, and small-cap funds have garnered substantial attention among equity fund categories. This article shall elaborate on large-cap equity funds investments explore why they are considered hidden gems in the equity fund category.

AMC categorization of mid- and small-cap funds

Asset Management Companies (AMCs) classify equity funds into large, mid, and small-cap funds. Here are the four key features that distinguish large-cap mutual funds from their mid-cap and small-cap counterparts.

  • Large-cap funds invest in established companies, and hence, are safe investments:

Economic downturns can seriously affect the returns that investors earn through their investments; and of all the equity fund categories, large-cap funds help investors weather economic downturns in the best way. Since small and mid-cap funds invest in smaller, less-established companies, they involve higher levels of risk for the investor. Large-cap mutual funds also aid in reducing the risk of an investment portfolio by offering stable returns in the medium-to-long run.

  • Large-cap funds offer better capital appreciation to investors in the long term:

An established way to grow one’s returns by investing in mutual funds is to invest for a medium to long term in a large-cap mutual fund. Investors can invest in these funds by opting for a Systematic Investment Plan (SIP) to maintain investment discipline. Large-cap funds also help investors deal with the volatility of the market.

  • Investors can benefit from higher liquidity through large-cap investments:

Investors who are looking for more liquid investment options can opt for large-cap stocks, since they are more liquid than their other equity-fund counterparts.

  • Large-cap funds help investors diversify across sectors:

Large-cap mutual funds spread their investments across various sectors of the economy. This diversification helps mitigate risk by reducing the impact of adverse events in any single industry.

Categories of investors

The three categories of equity mutual funds appeal to various categories of investors in different ways:

  • Investors who are risk-averse but wish to earn moderate-to-high returns: Large-cap funds offer a balance between safety and potential growth, making them suitable for investors with a lower risk appetite.
  • Investors who have a comparatively higher risk tolerance and are looking to invest for the long term: Mid-cap companies are volatile and have the potential to grow substantially. Mid-cap mutual funds help investors invest for the long term and offer a higher exposure to risk.
  • Small-cap funds are highly risky and are ideal for investors with a very high risk tolerance: Small-cap companies can be highly volatile and are subject to market fluctuations.

The right choice of equity fund depends on an investor’s financial objectives and investment horizon. Investors can also decide on making lump sum or SIP investments according to their profile. One of the tools that can help them create a financial plan can be an SIP calculator.