Large-Cap Vs Mid-Cap Mutual Funds
A large-cap is such a fund that invests a minimum of 80% of its net assets in large-cap companies, generally referred to as blue-chip companies. On the other hand, mid-cap companies must invest at least 65% of its net assets in mid-cap stocks.
As per the guidelines of the Securities & Exchange Board of India (SEBI), large-cap companies occupy the top 100 ranks in terms of the full market capitalisation of the company, whereas the mid-cap companies feature amongst 101 to 250 ranking in that list. While both these categories of funds are categorised under equity schemes, they tend to differ on specific parameters.
Here are four significant differences between large-cap funds and mid-cap funds:
Market Capitalisation Criteria
SEBI classifies the companies into large caps, mid-caps, and small caps based on their market capitalisation. Such a list is updated on a half-yearly basis by the Association of Mutual Funds in India (AMFI). As per the classification as at 31st December 2019, a company with a market capitalisation of more than Rs. 25,588 crores are classified as a large-cap company, while the mid-cap companies have an average market capitalisation from Rs. 8,243 crores to Rs. 25,587 crores Source: AMFI
As such, the majority portfolio of large-cap funds may be expected to be in the companies with market capitalisation higher than Rs. 25,588 crores, while the majority portfolio of mid-cap companies will comprise of mid-sized companies having market capitalisation from Rs. 8,243 crores to Rs. 25,587 crores. Thus, the difference in large cap and mid cap is on the basis of marketing capitalisation as classified by the regulator.
Considering the profile of the companies in which these funds invest in, the performance of the mid-cap companies tends to be more volatile. In contrast, large-cap companies may be relatively stable. This is because large-cap companies have a cushion of financial strength, while the mid-cap companies are generally on the path of growth.
The relative stability in large-cap funds helps them attract 19% share amongst overall equity funds with Assets under Management (AUM) of Rs. 1.46 lakh crore. On the other hand, higher potential of growth in mid-cap companies helps mid-cap funds to stay relatively popular amongst equity funds with 11% share with AUM of Rs. 0.89 lakh
Considering the relative volatility in mid-cap funds, such funds are more suitable for investors with moderate to aggressive risk profile. On the other hand, large-cap funds may be more suitable for conservative investors seeking equity exposure.
While the financial performance of large-cap companies may reflect yearly growth consistently, the performance of mid-cap companies may be cyclical, which may take a relatively long period for showing the desired growth. As such, mid-cap funds should be considered suitable for longer investment horizon, while large-cap funds are preferred for even medium to large term investments in equities.
Taxation of Large Cap Funds and Mid Cap Funds
Both, large-cap funds and mid-cap funds, invest a minimum of 65% of their net assets in the equity shares and equity-related securities. As such, all the mutual fund schemes under these two categories may be classified as equity-oriented mutual funds for taxation & any appreciation in investments in these funds is taxable as ‘Capital Gains’
If the investment period in these funds is less than 12 months, the gains are taxable as Short-Term Capital Gains (STCG) and taxed at 15%. On the other hand, if the investment period is 12 months or more, the gains are classified as Long Term Capital Gains (LTCG) and taxed at 10% without any indexation benefit (after Rs. 1 lakh exemption in respect of the aggregate LTCG on equity shares and equity-oriented mutual funds).
If an investor is facing a dilemma in terms of investing in large-cap funds or mid-cap funds, the differences between these funds, as discussed above, may certainly help the investors make an informed decision.
Note: The tax rates, as mentioned in the article, are for illustrative purposes only, and are updated as per the Union Budget 2020 passed by the Parliament. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment.
Disclaimers: The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance bill 2020. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.
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