Recently I met a couple who wanted to invest in Equity Mutual Funds. They informed me that thus far they had always invested directly in Shares and despite following some business channels regularly and noting the ‘advise’ dispensed by ‘experts’ on these channels, ended up losing more often than gaining.
They further added that they bought only blue-chip stocks.
On studying their portfolio, I found that their idea of a blue-chip included ‘brand-names’ which fell in the small-cap category as defined by SEBI. I felt that ideally, someone in the investment life-cycle stage of wealth consolidation like they were, would have been better served by building their pure equity portfolio around the category of Large and Mid-Cap Funds.
These funds were introduced as a separate category of Equity Funds by SEBI in October 2017. As opposed to a pure large-cap fund or a mid-cap fund, these funds have the leeway to diversify their investments across a single fund.
A Large and Mid Cap Fund, by definition is a type of equity fund that invests at least 35% of its AUM in large-cap stocks and another 35% in mid-cap stocks with leeway to invest more thereafter in either category as well as in debt and money market instruments. As it is a pure equity fund, one must have a long-term investment horizon while investing in this category, since, like all pure equity funds, its risk multiplies if targeted for short-term investments.
Like other Equity funds, this category too is taxed at the rate of 10% for Long Term Capital Gains (LTCG) made on the sale of units priced at over Rs 1 Lakh, and 15% for Short Term Capital Gains (STCG) if the units are sold within the time period of 1 year from the date of allotment.
These funds which effectively invest in the top 250 listed companies in terms of market capitaliaation have the combined features of Large Cap and Mid Cap Funds which offer relatively better stability, the balance of risk, and potential for higher returns in the long term.
The largest funds in terms of AUM in this category include SBI Large & Midcap Fund, ICICI Prudential Large & Mid Cap Fund, HDFC Large and Mid Cap Fund, Kotak Equity Opportunities Fund, and Axis Growth Opportunities Fund.
In the next column, we shall focus on a few funds from this category that have performed satisfactorily over time frames of 1, 3, and 5 years respectively. In the meanwhile, the couple I mentioned at the start of this column has woken up to the categorisation of funds by SEBI and how it can be used to determine their Risk-Reward ratio.
Head of LKW-India. He can be reached at email@example.com