Large and Mid Cap Funds — A Fixed Floor in Two Segments

The companies listed on Indian exchanges are ranked by size and grouped into bands, which our page on large, mid and small cap funds explains. This category must keep a stated minimum in the largest band and a stated minimum in the next band, simultaneously.

The remainder is flexible. The manager may add more to either band, or hold some smaller companies, within the scheme own stated limits.

So a large and mid cap scheme is not simply a large cap scheme with a few mid sized holdings sprinkled in. Both segments are substantial by rule, and that is what gives the category its behaviour.

Mid sized companies tend to be earlier in their development than the largest ones. Some grow into large companies. Others stall. Their prices move more in both directions as a result.

Including a meaningful share of them means the scheme will generally swing more than a pure large company holding. In strong markets that can help. In weak ones it usually means a larger fall, which our page on risk and volatility explains in terms of what that movement actually costs you.

The large company portion does the steadying. The proportion between the two is what decides how the scheme feels to hold in a bad year.

This is the comparison that matters most, because the two are often treated as interchangeable.

A flexi cap scheme may move freely between large, mid and small companies with no minimum in any. If the manager thinks mid sized companies are expensive, the scheme can hold very few of them. Our page on flexi cap versus multi cap covers that category.

A large and mid cap scheme cannot do that. It must keep its minimum in mid sized companies whatever the manager thinks of them, which means it will always carry that exposure through the periods when that segment struggles.

Neither arrangement is better. One gives the manager room to avoid a segment. The other ensures you keep exposure to it regardless. Which you prefer depends on whether you want the manager judgement to include the size decision.

Some households get similar exposure by holding a large cap scheme and a mid cap scheme separately. The results can look alike and the arrangements are not the same.

Holding two schemes means you decide the proportion between them, and you have to maintain it. If mid sized companies have a strong run, your split drifts and rebalancing means selling, which carries exit load and tax, as our page on switching between schemes sets out.

A single large and mid cap scheme does that balancing internally, within its own rules, without creating a sale for you. The trade is that the proportion is the manager choice within the band rather than yours.

For most households the single scheme is simpler. For somebody who wants to control the split precisely, two schemes are.

Because this category holds large companies by rule, it overlaps considerably with any large cap or index scheme you already own.

A household holding a large cap index fund, a large and mid cap scheme and a flexi cap scheme may find the same handful of large companies at the top of all three. That is not diversification; it is the same position repeated.

Our page on portfolio overlap covers checking this in ten minutes with the monthly holdings, and it is worth doing before adding this category to an existing portfolio.

Three things on the fact sheet tell you most of what you need.

The actual split between large and mid sized companies at present, which may sit well above both minimums or close to one of them.

The benchmark, which for this category usually combines large and mid sized company indices. Comparing the scheme against a pure large company index flatters it in some years and punishes it in others, as our page on the benchmark explains.

The size of the scheme, since a very large scheme has more difficulty building positions in mid sized companies, as our page on fund size and AUM covers.

Somebody with a long horizon who wants some exposure beyond the largest companies but prefers that exposure to be fixed by rule rather than left to a manager discretion.

It also suits a household that wants a single equity holding with a little more reach than a large cap scheme, and that will not maintain two separate schemes in a fixed proportion.

It is not a place for money needed within a few years, since the mid sized portion in particular can fall sharply and take time to recover. Our page on asset allocation covers matching money to its date first.

• Is your horizon long, meaning several years at the very least?
• Would you rather the size split were fixed by rule or left to a manager?
• What do you already hold, and how much does this overlap with it?
• What is the current split and the expense ratio?

We are distributors rather than investment advisers and we recommend no schemes. Our comparison of mid cap and small cap funds covers the segments further down the size scale. If you want help reading what you already hold, get in touch.