Small, Mid or Large Caps, What Equity Funds You Should Invest In?


Mutual Funds is a fruit-bearing yet complicated investment medium that needs close observation, realistic assessment and an open mind, especially when it comes to equity funds that are primarily dependent on market conditions. Equity funds are further divided into three broader parts Small, Medium and Large Cap, where ‘cap’ or market capitalization essentially refers to the value of a company traded on the stock market.

Now, since this portfolio is more volatile than debt funds and with the pandemic shaking up the bull, it becomes important to understand the benefits and risks involved within different portfolios.

In this 20-minute episode, our correspondent Surabhi Upadhyay speaks with finance stalwarts Pankaj Tibrewal – Sr. Executive, Vice President & Fund Manager at Kotak Mahindra AMC, and Anshul Sehgal – EVP & Head, Portfolio Management at Kotak Mahindra AMC about the right type of equity fund for you?

The conversation begins with a broader question of how one decides whether someone is better off with one big flexicap category – one large and one mid or do they need to invest in more niche products?

“It depends on the risk appetite of the investor and goal towards the end. That will help decide the kind of investment they’d want to make. Anyone who is a beginner should start with slightly risk-averse products, like maybe a debt cover product and then move to a balanced advantage – a dynamic equity kind of product “, responds Mr Pankaj.

The different products falling under the gambit of mutual funds help you understand and gauge the risks and volatility involved, then you can create a product preference.

Adding to the conversation, Mr Anshul spoke about how one needs to reflect on their investment horizon stage. If you are starting as an investor, then clearly, you need first to gain some experience in the investing world before you start taking bets on sectoral funds and thematic funds.

“Investing in sectoral funds and thematic funds is almost like art; you buy it if you appreciate the art. In this case, you have to appreciate the said funds”, says Mr Anshul.

Ms Surabhi then points to a direct question about mid-cap funds, starting with this subset’s definition and what sort of volatility an investor should prepare for?

Mr Pankaj quotes SEBI’s definition of cap – “top 100 companies in terms of market capitalization are considered large. Companies from 101 to 250 are considered mid-cap, and anything above 250 is called small-cap”.

In mid-cap funds, you need to have a minimum 65 percent allocation at any point to this said set. The remaining 35 percent can be a combination of large-cap, small-cap and cash.

The returns are generally higher in mid-cap; however, the volatility is higher in mid-cap during short-term investment. Mr Pankaj also added that mid-cap could go through sharp underperformance; hence any investor needs to be sure that he/she is there for a minimum of 5-7 years from an investment horizon perspective.

In conclusion, while investors need to be ready for volatility in wealth creation, the result could be good as mid-cap tends to outperform large and small-cap in the long run.

Further in the episode, the financial stalwarts delve deeper into sectoral and thematic funds and talk about the rookie mistakes that one can avoid while investing in such niche portfolios.

Disclaimer at the end of the article:

An Investor Education Initiative by Kotak Mahindra Mutual Fund.

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