During one of our recent discussions at office, one of the younger team members asked me what I thought of large and mid-cap funds as a vehicle for long term growth. My broad response was as shared below.
For the record, Large and Mid-Cap Funds were introduced as a separate category of Equity Funds by SEBI in October2017. As opposed to a pure large cap fund or a mid cap fund, these funds have the leeway to diversify their investments with more moderate weightage across a single fund.
A Large and Mid Cap Fund, by definition, is a type of equity fund that invests at least 35 per cent of its AUM in large cap stocks and another 35 per cent in mid cap stocks with leeway to invest more thereafter in either or any 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 and returns usually improve over a longer time horizon.
Like other Equity funds, this category too is taxed at the rate of 12.5 per cent for Long Term Capital Gains (LTCG) made on the sale of units priced at over Rs. 1.25 Lakh, and 20 per cent for Short Term Capital Gains (STCG) if the units are sold within the time period of 1 year from the date of purchase.
These funds which effectively invest in the top 250 listed companies in terms of market capitalization have the combined features of Large Cap and Mid Cap Funds which offers relatively better stability, balance of risk and potential for higher returns in the long term. The usual Benchmark used for Large and Mid Cap Funds is the Nifty Large-Midcap 250 Index.
The Indian markets have witnessed a time correction over 15-18 months and the pain has been prolonged by the war between Israel-America and Iran. The closure of the Strait of Hormuz as a result of this war has been a point of pain for not just adversaries but even other nations, including India which has non-adverse relations with all the three countries involved.
Being an importer of oil, every spike in crude oil prices has resulted into a weakening of the stock market indices. There is however latent hope among market participants that hostilities will cease sooner rather than later which could trigger a sharp market rebound. Historically market rebounds have started top-down i.e. from large caps onto mid-caps and then, small-caps. While there is no guarantee or reason to believe it may always be so, the odds point to it and if it is indeed so, large and mid-cap funds could be among the earliest categories to ride the rebound.
( Ashok Kumar heads LKW India but the views expressed in this column are his own. He can be contacted at ceolotus@hotmail.com )
