Why Diversifying With Large & Mid-Cap Funds In A Portfolio Is Important?

By diversifying your mutual fund holdings among various fund categories, you can not only reduce your risk exposure but also achieve balanced growth, sector exposure, create growth resilience across different market cycles, liquidity, generate risk-adjusted returns, and build a portfolio that is uniquely tailored to your financial goals, time horizon, and risk tolerance. Here we have demonstrated the importance of diversifying with large and mid-cap funds in a portfolio via interviews with many well-known industry professionals.

Shaily Gang, Head - Products, Tata Asset Management

It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you are wrong- George Soros

The strength of Tata Large and Midcap fund lies in its judgement on which stocks to go overweight on and exposures to be taken at what price. Buying in early post our conviction but before market consensus with a steady mix of stable earnings stocks and stocks with earnings surprise is what the fund endeavours to practice.

True bottom-up buy & hold portfolio having flexibility across large cap and mid cap segments with holdings evenly spread rather than a long tail or high concentration, is what you get when you invest into the fund.

True bottom-up portfolio

Tata Large and Midcap fund is a true bottom-up portfolio and may exist as part of an investor's core portfolio. The fund endeavours to make excess returns over the Benchmark by being steeply overweight on stocks that the FM expects to perform and turns out the same. Another route to excess returns is by buying stocks around equal weight or slightly overweight but at a price such that the headline sector performance of the portfolio holdings is higher than the headline sector performance of the Benchmark holdings. One more route is to pick stocks outside the Benchmark which outperform the Benchmark.

Shifting allocations to navigate scenarios

The fund is able to shift its asset allocation across market cap categories, allowing it to position itself to take advantage of prevailing market conditions - higher large cap, lower mid and small cap allocations during low growth and tight liquidity conditions and vice versa in high growth and adequate liquidity conditions.

Fundamental stock picking with low turnover

Essential characteristics of stocks picked are growth, low debt and high free cash flows. Companies that are low debt and therefore able to retain a greater part of their revenues as profits. The fund prefers to buy and hold onto compounding stocks over the medium to long term in order to gain significant returns.

Buying early

The fund buys in early into stocks that the fund manager has a more positive view on than the market consensus and thus will be able to surprise on earnings. Visibility and our conviction on the Trigger with the market not acknowledging the same is the key to the stock being classified as GARP today.

Not too lean not too wide a portfolio

The number of holdings in the fund range between 40-50 with very low turnover. However, in a phase when every stock rises and momentum plays, it might not be easy for a 40-50 stock fund portfolio to create excess returns. However, when the dust settles the portfolio is expected to benefit and assist long-period returns as our holdings carry a margin of safety.

Farhad Gadiwalla, Executive Vice President & Head - Products at UTI AMC

When it comes to the world of investing, there is no one-size-fits-all approach. Each individual's portfolio is unique as it is tailored to address their financial goals, keeping in mind their risk tolerance and investment horizon. If you have a long-term financial goal and have the ability to take risks in equity mutual funds, a combination of large-cap and mid-cap funds in your portfolio would provide the right mix of risk & reward.

At one end, your exposure to large-cap funds would provide relative stability as they tend to be less volatile, while the mid-cap funds would bring in the potential of higher returns, however with higher volatility. The key here is to diversify & allocate to funds that align with your investment goals.

Alekh Yadav, Head of Investment Products, Sanctum Wealth

Diversifying a portfolio with both large and midcap funds highlights the fundamental principle of investing, which advocates against putting all assets in one basket. Investors should diversify across geographies, asset classes, market caps, sectors, and securities. In the context of India, following the SEBI recategorization in 2018, active large-cap funds face stringent investment constraints, which limits their ability to outperform the benchmark. Hence, we prefer index or smart beta funds in the large-cap category.

We believe that the mid-caps offer substantial room for outperformance as some of these companies are still not covered by institutions and hence there is information asymmetry. In financial markets cycles are an inherent characteristic. Likewise, large-cap and midcap funds also experience cycles, with times when large-cap stocks do well and other times when mid-caps outperform. Therefore, diversifying across both categories is prudent keeping investors' risk profile in mind. Investors can then adjust their overweight or underweight positions in large and midcap funds based on prevailing market conditions.

Himani Chowdhary, NISM Certified Research Analyst

Large cap funds invest in established companies like ITC, Reliance etc. which provide stability and decrease the riskiness of the portfolio. But because of this, there is less room for growth since these companies are already big giants and have grown a lot already. So to get more returns and to invest in new and upcoming sectors, some portion should be invested in mid-cap funds.

By investing in both large-cap and mid-cap funds, one can decrease the overall risk while still having the potential for good returns. There are two ways to invest in both, either invest in a large-cap and a separate mid-cap fund or invest in a multi-cap fund that invests in companies of varied sizes. Do make sure to check the investment strategy, past history of returns and expenses of the funds before investing. Lastly, make sure to get advice from a registered fee-based investment advisor before investing.

Shavir Bansal, CEO & Founder, Bekifaayati

Before deciding on your Mutual Fund allocation, it's important to define the time frame of your investments and your risk appetite. If you can hold your investments for more than 12-15 years, and have a decent risk appetite, I would still tilt towards the Small Cap and Mid Cap Funds. If that is not the case - the majority of my allocation would be locked in Large Cap Funds. Generally in rising markets, Small & Mid Cap Funds tend to outperform Large Cap Funds. And in falling markets, Large Cap Funds usually perform better. Over the last couple of years, broadly India has been a growth story, which is why we've witnessed superior returns across both Small Cap and Mid Cap Funds.

The Number of Folios for Small Cap Funds has almost risen by 2.5 times in the past 2 years and is now equal to the Large Cap Fund Folios. This can also largely be attributed to the Recency Bias. There has been a lot of Trend Chasing in both of these categories. It is critical to understand that Markets are Cyclical. Highs are Always followed by the Lows. This is why Diversification becomes supercritical. Having Large Cap and Mid Cap Funds in your portfolio will give that protection from high volatility when the market starts fluctuating (which it will). At current levels, the margin of safety for small-cap Funds has reduced. If and when the market corrects, the flows will most likely shift to large and mid cap funds.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.