Equity Funds are like the diamonds of mutual funds – desirous and aspirational. There are multiple ways of classifying equity funds by diversification into sectors, by market capitalization, investment style, and investment goals
Equity Funds by diversification across:
- Sectors – Sectoral / Thematic Funds
- Market Capitalization – Large-cap, Mid-cap, Small-Cap, Large and Mid-Cap, Multi-cap Funds
- Investment Style – Index Funds, Value Funds, Contra Funds, Focused Funds
- Investment goals – ELSS(Tax-saving)
In this article, we will talk about the most common dilemma when choosing between equity funds by diversification (based on market capitalization) – Should you go large or should you go small?
Large-cap Mutual Funds
Large-cap Mutual Funds in India invest a significant portion (minimum 80%) of their total assets in the top 150 companies (basis market capitalization). These companies are reputed names with a strong performance track record and long vintage. They are known for their credible management and robust corporate governance policies. Generally, the market capitalization of these companies is in excess of Rs. 20,000 crores. Currently, there are 100 large-cap mutual funds in India.
Small-cap Mutual Funds
These funds invest in stocks of companies with low market capitalization (Rank 251 and beyond). As per SEBI guidelines, at least 65% of the corpus needs to be invested in small-cap stocks. New players in niche segments or upcoming markets, start-ups belong to this category. There are more than 4000 companies in the small-cap space.
Large-cap fund vs small-cap fund – which one would get you better returns?
Now coming to the million-dollar question- which fund should you prefer for better returns? Unfortunately, there is no universal answer which will suit all investors.
Small-cap funds definitely have the potential for significant upside growth. The category average (Five-year rolling return for the period between 2005 and 2020) for small caps is around 13%. It has handsomely beaten the benchmark (S&P BSE Small cap TRI) CAGR of 9.37%. But the journey is often tumultuous and long. These funds are most prone to market volatility due to their relatively limited market reach, scale, resources, or experience. Also, not all small-cap funds are able to crack the winning formula. Hence, these funds require investors with immense patience, discipline, and aggressive risk appetite. So, if you are someone who does not want to assume too much risk, you may not be able to last the volatile journey of small-cap funds to cherish the high returns in the future.
However, if you are an aggressive investor, right now is a good time to invest in these funds. The sharp market corrections (due to the global COVID-19 pandemic) have opened up solid buying opportunities. Many fund houses have re-opened lump-sum subscriptions for their short-term funds.
Companies with large-cap stocks are already well-established players in the market. Often, they are the market or industry leaders. Hence, their growth rate is sluggish. The stock prices witness little to no appreciation. However, they recompense their investors with periodic and steady dividend payouts. These timely cash-flows can help to supplement your regular income. Additionally, in case of a market downtime, these mature companies are able to manage their losses much more effectively than small-cap stocks.
Also, your investment time horizon plays a crucial role in this decision. For instance, small-cap stocks need
So, it all boils down to how much risk is too much for you!
Best large-cap and small-cap funds in India
Irrespective of which way you want to sway, we have the best performers from both the categories.
Top-performing large-cap mutual funds in India:
- Canara Robeco Bluechip Equity Fund
- Axis Bluechip Fund
- Mirae Asset Large Cap Fund
- Edelweiss Large Cap Fund
- Sundaram Select Focus Reg
- BNP Paribus Large Cap Fund
- HDFC Index Sensex Fund
- Tata Index Sensex Fund
- Invesco India Largecap Fund
- Nippon India Index Sensex
Top-performing small-cap mutual funds in India
- SBI Small Cap Fund
- Axis Small Cap Fund
- HDFC Small Cap Fund
- Nippon India Small-Cap
- Kotak Small Cap Fund
Final Words
Markets are cyclical. No specific cap-fund will perform well at all times. So, you need to look inside and see what is right for you and in line with your financial goals, risk appetite, and investment horizon. Historical data proves that equity markets yield better returns in the long-run when compared with other asset categories. Since the formation of BSE Sensex, the equity market has shot up 380 times and generated 16% CAGR! So, if you stick with your investments (through the good and bad times), you will surely be rewarded. The only caveat being – the fund’s objective should be in sync with your investment profile, irrespective of the type of equity funds.