Building a mutual fund (MF) portfolio can sometimes be tricky. Various people will have varying views on how to construct an MF portfolio and how much money should be allocated to each section. However, the allocation will undoubtedly differ for investors with different risk profiles given the characteristics of firms with various market caps and their risk-return profiles.
Major categories of Mutual Funds (MFs)
There are three major categories of mutual funds- large-cap mutual funds, mid-cap mutual funds, and small-cap mutual funds.
Large-cap funds are considered to be safer in comparison to mid and small-cap funds. Small-cap funds are associated with higher risk, and their performance is impacted by market fluctuations. Midcaps are considered good for portfolio diversification as the companies have good growth potential. However, these funds have a significant amount of risk associated with them.
Large-cap vs mid cap vs small cap: How to find out which fund suits you the best
SEBI registered tax and investment expert Jitendra Solanki suggested having a mix of all three- large cap 50 to 70% and the rest between mid and small cap is a good exposure.
“Of the total investment, one should invest 30 % in large cap, 30% in flexi cap, 20% in mid-cap, and 20% in small cap," said tax and investment expert Balwant Jain
The choice of schemes can be decided mainly by the factors such as the objective of investment, investment horizon, and risk appetite of investors. “Mid-caps and small caps exhibit higher volatility compared to large caps but there is higher growth potential in them in the long term. In general, Investors should diversify their investments across market caps. Investors with long investment horizons like 10 years and above and higher risk appetite can consider some allocation in small caps but for an investment horizon of 5-7 years, large-cap funds will be more suitable. Midcaps should be in the portfolio along with a large cap,” said Pankaj Mathpal, MD & CEO at Optima Money Managers.
Vinit Khandare, CEO and Founder, MyFundBazaar has suggested funds based on the nature of the investor- conservative, balanced, or aggressive
Conservative Investor: In any case, relatively few of these investors' investments are in stocks. As a result, only large-cap stocks can receive the complete equity allocation. Investments in flexi-cap funds, active large-cap funds, and passive large-cap funds can all be used to achieve this, as long as large caps make up the majority of the portfolio.
Balanced Investor: A balanced investor should consider having some exposure to small-cap stocks. The remaining 25–30% can be divided between midcaps and small-caps, with roughly 70–75% allocated to large caps. An assortment of large-cap funds, flexi-cap funds, and large and midcap funds can be used to accomplish this.
Aggressive Investor: A risk-taking investor can think about investing 50–60% of their portfolio in large-cap stocks, 15–25% in mid-cap stocks, and the remaining 15–25% in small-cap stocks. By combining large-cap funds, flexi-cap/large mid-cap funds, midcap funds, and smallcap funds, this can be accomplished.
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First Published:
26 May 2023, 11:37 AM IST
Business NewsMoneyPersonal FinanceMutual Funds: Large cap vs mid cap vs small cap. How to find the best MFs for you
