Domestic equity mutual funds witnessed a net inflow of more than Rs 10,000 crore in May 2021—a 14-month high and the third consecutive monthly infusion.
Given the surging equity valuations in the country, investors are continuing to opt for mutual fund investments, according to the data from the Association of Mutual Funds in India.
Equity mutual funds can be classified into large-cap, mid-cap, and small-cap funds—based on the market capitalisation of the companies they invest in.
A market risk does exist in large-cap funds but is comparatively lower due to the financial health of the companies. So, investors should be prepared for possible moderate losses.
Mid-cap funds, on the other hand, have higher risk as the companies are not as mature. However, Shahi said that the volatility is still less than the small-cap funds.
Small-cap funds, meanwhile, have a higher risk compared to the other two funds as they invest in young companies which have high volatility in share prices.
Large-cap funds usually provide stable and more predictable returns, but lesser growth potential due to the size of the companies.
Mid-cap funds, on the other hand, have the potential to offer higher returns than large-cap funds as the growth potential is more. However, it is lesser than in small-cap funds.
Small-cap funds, on the other hand, can offer higher returns than large and mid-cap funds due to the small size of companies which makes share prices more volatile.
Large-cap funds generally have a time horizon of three to five years because the companies are mature and can provide capital appreciation over this period.
Mid-cap funds, meanwhile, have a slightly longer time horizon (five to seven years) needed to allow the company to mature and maximise returns.
Small-cap funds require an even longer time horizon than mid-caps (seven to 10 years) as companies are generally in their early stages.
While choosing one of these, all the above factors should be considered and individuals must invest in the fund that matches their risk profile and time horizon.
Investors with a lower risk tolerance looking for investment opportunities in the equity markets usually prefer large-cap funds.
On the other hand, investors with medium risk tolerance and seeking exposure to the equity markets prefer mid-cap schemes.
Small-cap schemes, meanwhile, are for aggressive investors with higher risk tolerance.