Large and mid-cap funds have their own set of advantages and limitations. However, many well-managed funds have successfully outperformed the benchmarks by at least 70–80%, according to Kshitiz Mahajan, managing partner and chief executive officer of Complete Circle Wealth.
Citing the example of Parag Parikh Flexicap Fund, Mahajan said that it has consistently given above-benchmark returns. "Its foreign exposure adds a layer of liquidity, which has occasionally benefited the portfolio but can also introduce volatility."
On the other hand, Mahajan highlighted that HDFC Mid Cap, the largest fund in the mid-cap sector, with a corpus of Rs 80,000 crore, has outperformed the benchmark by 80% of the time. "Not all funds in this segment perform consistently, many have been managed with sound strategy and intent," he said.
Mahajan emphasised that after the 2018 mutual fund re-categorisation, which introduced long-term capital gains tax and GST, the small and mid-cap segments faced a dip in performance, majorly from September 2020 onwards.
"Due to valuation mismatches, these stocks were trading at lower premiums. But it reversed as these sectors started to recover. Increased capital inflows contributed to their strong uptick, with small and mid-cap funds recording gains," Mahajan added.
Besides, for portfolio construction, Mahajan suggested that investors can pair large-cap funds with small-cap options from different baskets. Similarly, a mix of small-cap and mid-cap funds with smaller corpus sizes can offer diversification, he said.
"This strategy provides benefits like lower expense ratios, more comprehensive research, and improved liquidity. This helps prevent any potential liquidity crunch for investors," Mahajan added.
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