Risks, Rewards and Large & Mid-Cap Funds

New Indian Express

3 days ago

I once met a later investment life-cycle stage couple who wanted to invest one-third of their portfolio in equity mutual funds. They informed me that thus far they had always invested directly in shares and inspite of following every 'Rule' of Investing they had read of in 'best-selling' investment books, had ended up losing more often than gaining.
They told me that they bought only blue-chip stocks. On studying their portfolio, I found that for them blue-chip meant familiar 'brand-names'. Now some of these worthies fell in the small-cap category as defined by SEBI. I felt that ideally, someone in the investment life-cycle stage of wealth consolidation they were would have been better served by building their equity portfolio component 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 12.5% for Long Term Capital Gains (LTCG) made on the sale of units priced at over R1.25 lakh, and 20% 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 capitalisation have the combined features of Large Cap and Mid Cap Funds which offer relatively better stability, balance of risk and potential for reasonable returns in the long term.
With a comparatively more limited universe of stocks to select from as compared to Flexi-cap or Multi-Cap funds that have the mandate to invest across market capitalisations, the onus remains on beating the benchmark index. That quite a few of them have managed to do so over multiple time frames suggests that there could be a case for Active over Passive funds in the Indian market, for longer than originally anticipated.
In the meanwhile, the couple I mentioned at the start of this column woke up to the categorisation of funds by SEBI and how it can be used to determine their risk-reward ratio. Their investment journey would hopefully have been be a lot smoother and more profitable too, thereon.
(Ashok Kumar heads LKW India. The views expressed here are his own)