The case for investing in large- and mid-cap mutual funds

After the categorization of the scheme announced for active equity mutual funds, a new category has emerged – the large-cap and mid-cap funds. This is the intersection product of the Venn diagram which has been mandated to invest in the top 100 listed companies by market capitalization considered to be in the large-cap category and invest in the next 150 listed companies by market capitalization, which collectively are the mid-cap companies. Effectively, this category of equity mutual funds primarily invests in the top 250 listed companies.

How big are these companies? To put it in perspective, the mutual fund industry association publishes (every six months) the list of all the permitted listed companies, in which mutual funds can invest in their equity schemes. This list has 5049 companies, and the total market capitalisation of these companies is Rs. 397.09 lac crores (as at the end of June 2024). The 100 large-cap companies (out of these 5049) have a market capitalisation of Rs. 252.65 lac crores. The mid-caps (next 150 companies) have a market capitalisation of Rs. 72.30 lac crores. Together, these 250 companies add up to Rs 325 lac crores of market capitalisation, a whopping 82% of the total value of all listed companies. In other words, 5% of the total listed companies constitute 82% of the total value of all listed companies. So, this is a formidable part of the listed stock markets. Industry leaders, leading sectors, indicators of the Indian economy, etc. are part of these 250 companies.

For an investor, this category allows them to invest in a wider playing area. They have the option to invest in either a large-cap fund or a mid-cap fund. However, the large- and mid-cap category allows a combined alternative that invests a minimum of 35% in each of the large- and mid-cap categories. Thus, 70% of the scheme will always be equally divided between both the categories. Also, the 250th company currently has a market cap of around Rs 27500 crores and the first company has a current size of Rs 19.50 lac crores. This is a 71x growth from the 250th company to the first one. So, there is a long growth runway for such companies. This runway is the essence of a large- and mid-cap fund as you are trying to capture in this fund.

In an active equity fund of this category, investors can participate in leading companies chosen by the fund managers through the rigor of the fund manager’s investment process. The fund managers, through their selection process and evaluation metrics, can build a portfolio of long-term, durable investment ideas that could grow over the long term. The fund managers also have the option to invest in attractive ideas in a universe of 250+ companies in the remaining 30% of the portfolio. Therefore, the fund manager can have a diversified fund with a 70/30 allocation between the top 250 companies and the rest of the investment universe, if required.

In the current economic landscape where India is witnessing the formalisation of the economy, people and businesses are becoming more integrated and connectivity is improving due to investments in infrastructure creation and modernisation. Despite weak global signals and the impact of COVID-induced disruptions, India has moved its global GDP ranking from 11th to 5th over the last decade, which should be seen considering the imbalances and challenges of the past few years. With policy continuity and focus on fiscal prudence and spending in critical areas for the future, the current landscape will continue to yield strong long-term corporate investment ideas. This is the opportunity where a diversified equity fund focusing on the top 250 companies would invest. These companies have grown in the past and could continue to grow in the future as the Indian economy grows. Secondly, these large companies are big in India but could be much smaller than their global counterparts in the same line of business. For instance, by assets, India’s largest bank is ranked 47th on the list of the world’s largest banks. India’s 12 key ports together handle less than 25% of the total containers handled by the world’s largest port. India sold 1.5 million EVs in 2023, China sold 8.1 million EVs in the same period. As a country emerges from low-income to middle-income, India’s GDP per capita is US$2,730, far behind China at US$13,140, ​​as against US$85,370 (IMF data as of July 2024). By most metrics, we have come a long way, but the future seems to indicate a huge runway of growth ahead compared to the economic milestones of the past two decades.

Investors looking to participate in these growth themes could consider large-cap and mid-cap funds, a category that benefits from the strength of large-cap companies and the agility of mid-caps. Such funds could provide a long-term core capital investment option. Source: RBI, CCIL, MOSPI, Amfiindia.com – as of June 2024, Bloomberg IMF, CEBR (Centre for Economic and Business Research) 2030 estimates. Data as on 31st July 2024. Disclaimer: All figures and data provided in the document are dated unless otherwise indicated. In preparing the material contained herein, ITI Asset Management Limited (“AMC”) has used information that is publicly available. However, AMC does not guarantee the accuracy, reasonableness and/or completeness of any information. The information provided is not intended to be used by investors as the sole basis for investment decisions, who must make their own investment decisions, based on their own investment objectives, financial positions and specific investor needs. Investors are advised to consult their own legal, tax and financial advisors to determine the potential tax, legal and financial implications or consequences of subscribing to the units of ITI Mutual Fund. The information contained herein should not be construed as a forecast or promise nor should it be considered as investment advice. The AMC (including its subsidiaries), the Mutual Fund, the Trust and any of their officers, directors, staff and employees shall not be liable for any loss or damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential damages as well as any loss of profits of any kind arising from the use of this material in any manner. Statements made herein may include statements of future expectations and other forward-looking statements that are based on our current opinions and scenarios and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied by such statements. Readers shall bear full responsibility for any decisions made on the basis of this information.