Just when you begin kickstarting your journey in the stock market, there are a zillion questions popping in your head. It means you are thinking about which stocks to invest in, and here you can find sufficient info. When you are pacing from Large Cap to Mid Cap funds, and wondering where to put your money, here are the specifics you would need to know to make the right choice.
What are Large Cap and Mid Cap Funds?
Large Cap Fund Defined: Large-cap mutual funds invest primarily in firms with a high market capitalization. Large-cap funds are well-known for providing stable returns. Corporations in which large-cap funds invest are often leaders in their sector of business and, as a result, tend to be more stable in times of market volatility than small or mid-cap companies. Large-cap firms often have a strong track record in the market, which is supported by corporate governance standards. When you want stable growth, you can find it in good Large-cap funds.
Mid Cap Funds Defined: Mid-cap firms account for 80% to 90% of the total market capitalization of all BSE-listed companies. The market capitalization of mid-cap firms ranges from INR 500 to INR 10,000 crores. The BSE -Midcap Index includes mid-cap companies. Mid-cap funds exclusively invest in mid-cap companies. These funds are known to play in favor of new investors, so if you are a new investor, find yourself the best midcap funds to invest in, and at the same time, earn profits over your investment.
The Major Difference Between Large and Mid Cap Funds
What Types of Investors do the Funds Suits?
- Conservative investors would find large-cap funds more suitable.
- The Mid Cap funds are more suitable for moderately risk-tolerant investors.
What are the Risk Factors for the Funds?
- Large-cap fund possesses a relatively lower risk.
- These are riskier than large-cap funds.
- Large-cap companies are less volatile and highly liquid.
- Mid-cap funds are slightly volatile and quite liquid.
The Potential for Growth:
- Large-cap funds have a higher potential to generate stable returns.
- These funds have a moderate potential for growth.
Who Should be Investing in Large Cap Funds?
As previously said, large-size funds are appropriate for cautious stock investors. Because these funds’ asset allocation is primarily made up of securities issued by generally stable corporations, their performance is consistent. As a result, large-cap funds are less exposed to equity market volatility.
Investing in large-cap funds is appropriate for people who want to diversify their portfolios by holding the stocks of top corporations from various market sectors. If one sector fails to fulfill expectations, the other sectors may be able to mitigate the negative consequences. On the other hand, because the underlying companies are steady and often produce lower returns than small and mid-cap enterprises, the returns offered by these companies can be limited.
If you are not ready to take a significant risk and are okay with mediocre returns, you should consider investing in these funds. These funds can help first-time equity investors get started with market-linked assets. It will provide them with an idea of what mutual funds are capable of.
Who Should Invest in Midcap Funds?
It is for investors with a Long Term Investment Horizon. As we all know, large corporations do not emerge from anywhere. Investors must be patient with their investments because the underlying asset of these funds is a company that has yet to become large. Furthermore, because tiny enterprises are not as financially solid as large corporations, they may struggle and take time to recover during a slowdown. To properly realize the benefits of investing in these funds, one should do so for a period of 7 to 10 years.
They are riskier than large-cap funds, but they also provide investors with the possibility to outperform the market. As a result, only those investors who are willing to face risks should choose this fund type.
In the short, to medium term, these can be volatile. You might even notice a big reduction in the value of your portfolio, and that too abruptly. Only those who are willing to accept such volatility should invest in them.
Large Cap: Because large-cap funds are a type of equity fund, they must be taxed similarly to other equity funds. Until Budget 2020, dividends were tax-free in the hands of investors since fund houses paid dividend distribution tax (DDT) before delivering dividends to investors. The Budget 2020 revised this law by restoring the traditional method of taxation profits in the hands of investors. The dividends paid by mutual funds are added to your total income and taxed according to your tax bracket.
The capital gains offered by equities funds are taxed differently depending on the holding period. When you sell your fund units after a one-year holding period, you realize short-term financial gains. These gains are taxed at a flat rate of 15%, regardless of your income tax bracket. When you sell your stock fund units after a one-year holding period, you realize long-term financial gains. These gains of up to Rs 1 lakh per year are tax-free. Any gains in excess of this amount are taxed at a rate of 10%, with no indexation advantage offered.
Mid Cap: It is the post-tax returns that are important. So, always examine what your return will be after taxes are subtracted because that is what matters. You should be familiar with how mid-cap funds are taxed in order to assess this. The capital gains generated by selling your mid-size fund are taxed based on how long you held the investment.
For Short Term Capital Gain Tax (STCG), if you sell your investments within one year, the gains are categorized as Short Term Capital Gain (STCG) and must be taxed at 15%. For Long Term Capital Gains Tax (LTCG), gains on mid-cap investments held for longer than a year are taxed as Long Term Capital Gains (LTCG). The gains of up to one lakh rupees in a fiscal year are tax-free. Gains over one lakh rupees are taxed at a rate of 10%.
The stock market is full of wealth creation opportunities, given the rewards, it also has risks as its by-product. Well, if you have a higher risk appetite, they are for you, and if you aren’t, the large-cap funds would be most suitable.