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Summary: Most investors expect safety from large-cap funds. But what if your large-cap fund is actually betting big on mid and small-cap stocks? In this piece, we uncover: a) Which large-cap funds have the highest mid and small-cap exposure, b) which ones are playing it safest and c) whether these bets have paid off in the last one and five years.
Most investors choose large-cap funds with a single expectation: safety. You want your money parked in the biggest, most stable companies, like the Reliances, the TCSs and HDFC Banks of the world. After all, that’s the whole point of a large-cap fund, right?
Well, mostly.
What many investors don’t realise is that SEBI’s rules for large-cap mutual funds allow up to 20 per cent of a fund’s assets to be invested outside of large caps, that is, in mid- and small-cap stocks.
And many fund managers make use of this flexibility.
Some use it to boost returns. Others use it to express high-conviction ideas that may not be found in the top 100 companies by market capitalisation. But the result is that even your ‘large-cap fund’ may have a mid-cap and a small-cap twist.
Let’s look at how different large-cap funds are using this leeway, and which ones stick strictly to large caps.
5 large-cap funds with the highest mid-cap exposure
| Fund name | Mid-cap allocation |
|---|---|
| Bandhan | 11.54% |
| Mirae Asset | 11.30% |
| Invesco | 9.66% |
| ITI | 9.53% |
| Quant | 8.16% |
On average, large-cap funds have around 2.95 per cent of their portfolio in mid-cap stocks. However, some fund houses go well beyond this. For instance, large-cap funds from Bandhan, Mirae Asset and Invesco India have allocated between 9.66 per cent and 11.54 per cent to mid-cap stocks, more than three times the category average.
Why does this matter? Mid-cap exposure can give these funds a performance boost when mid-cap stocks are rallying. But it also brings added volatility, which is important to consider if you’re expecting a low-risk, large-cap-oriented product.
So, has this higher mid-cap tilt helped? Over the last 12 months, schemes from Bandhan, Mirae Asset and Invesco India have delivered positive returns, but large-cap funds from ITI and Quant, which also had sizable mid-cap bets, have seen negative returns. Therefore, there’s no conclusive proof of whether the high mid-cap allocation has worked for or against these funds.
And over five years? It’s still inconclusive. While some of these funds have performed well, others haven’t. Plus, the degree of mid-cap exposure may have shifted over time. So, we can’t say definitively whether more mid-caps equals better performance.
5 large-cap funds with the highest small-cap exposure
| Fund name | Small-cap allocation |
|---|---|
| Motilal Oswal | 9.53% |
| LIC | 6.47% |
| Bank of India | 6.04% |
| ITI | 4.54% |
| Bandhan | 3.90% |
On average, large-cap funds have a 2.46 per cent allocation to small-cap stocks. But some funds deviate sharply from this. Motilal Oswal’s large-cap fund, for instance, has nearly 10 per cent in small caps, which is four times the category average. LIC and Bank of India also have relatively higher allocations.
Such aggressive tilts can appeal to investors who are comfortable taking on extra risk for potentially higher returns, especially during small-cap rallies. But as always, the trade-off is higher volatility.
That said, a deeper look reveals no clear pattern. While Motilal Oswal’s scheme has been the top performer over the past 12 months, others like Bank of India and ITI delivered negative returns despite their higher small-cap allocations. Maybe these funds suffered due to the small-cap universe not faring too well in the last year or so.
Even over a five-year period, there’s no consistent edge. Motilal and ITI’s schemes haven’t been around that long, and the rest haven’t shown standout performance that can be directly attributed to small-cap bets.
So, what does all this tell us? It’s not about how much mid- or small-cap exposure a large-cap fund takes. What matters is which stocks they pick.
4 large-cap funds with no mid and small-cap exposure
These are the large-cap funds that play it safest:
- Axis
- Bajaj Finserv (It has yet to complete one year, though)
- PGIM India
- Samco (It is yet to complete a year)
If you’re seeking pure large-cap exposure, these funds are the cleanest plays. Fund managers of Axis and PGIM India large-cap funds have stayed firmly within the top 100 companies, ensuring lower volatility and more predictable returns. Their conservative strategy seems to have helped in the current market, with both schemes delivering positive, single-digit returns over the last 12 months, which is significantly better than the large-cap category average of -0.71 per cent.
However, zoom out to a five-year horizon and the picture flips. Axis and PGIM India’s large-cap funds are at the bottom of the pack, finishing last and second-last in their peer group. While there may have been some adjustments to their mid- and small-cap allocations over the years, the conservative approach hasn’t worked in their favour over the long term.
So, if you have chosen a large-cap fund expecting low volatility and stable returns, it’s worth checking your fund’s portfolio. Some funds use the 20 per cent flexibility with the hope of extracting some juice. Others don’t.
Neither approach is wrong, but you should know what you’re signing up for.
To check your large-cap fund’s latest holdings, head over to Value Research’s Fund Pages, click on the fund’s name and head over to the ‘Portfolio’ section. You’ll find a detailed breakdown of how much your fund has allocated to large-, mid- and small-cap stocks.
And if you want to understand your mutual funds better, consider subscribing to Mutual Fund Insight, our monthly magazine that simplifies fund investing, gives performance deep-dives and helps you make smarter investment decisions.
Also read: Can a mid-cap fund offer enough large-cap exposure?
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