Risks Associated with Large and Mid-Cap Funds

VMPL
New Delhi [India], February 13: Imagine a beautifully laced and decorated large vintage umbrella that had been an heirloom you received from your grandparents. That is a large-cap fund for you-steady, sustainable, and dependable in giving long-term returns. Another umbrella which is sturdy but needs intermediate attention for repair and maintenance can be your mid-cap funds. But both are quite efficient in providing shade and protection when used at the right time in the right situation. But both can be used in congruence once you understand the utilities like Motilal Oswal Large & Midcap Fund.
However, none of them function without risk. Market risk, which involves market volatility, sectoral performance and liquidity risk, including fund size and redemption policies, are the major risks that you can face while investing in large and mid-cap funds. But should we refrain from such lucrative investment tools just because of the risks? Read on to find out how you can balance and manage the risk-return scenario for both these funds.
Comprehending the Basics of Large and Mid-Cap Funds
Large & Midcap Funds are equity mutual funds that invest in both large and medium sized companies. A large & midc-cap fund should invest at least 35% in large-cap stocks (top 100 companies) and 35% in mid-cap stocks (101st to 250th companies). These funds offer a balance of stability from large caps and growth potential from mid caps. These funds come with moderate to high risk and are ideal for long-term investors.
Key Risks Associated with Large and Mid-Cap Funds
Over the past five years, large and mid-cap funds have experienced a significant five-fold rise in assets under management (AUM) from 0.50 lakh crore in July 2019 to 2.57 lakh crore in July 2024. The annualised compounded returns of large and mid-cap funds stand at 44.07% over a year, 21.85% over three years and 23.67% over five years.
The major risks are :
1. Risk of Volatile Market:
Simply put, large and mid-cap funds invest in stocks of companies with large and medium market capitalisation respectively. The valuation of these funds is the result of the performance of the companies which keeps fluctuating depending on the prevalent microeconomic factors like SEBI regulations, RBI policies, government directives, interest rate risks etc.
2. Risk of Liquidity:
Since large-cap funds are less impacted by dynamic market situations, the existing options are more flexible than mid-caps. Especially when the market is bearish and slow, exiting out of mid-cap investment becomes challenging due to unfavourable pricing.
3. Fund Performance Risk:
Mutual fund returns are not guaranteed. Market fluctuations and phases can impact these funds quite strongly. If mid-caps underperform large-cap stocks, it ultimately impacts the overall fund performance. For instance, constituents of Motilal Oswal Large and Mid Cap Funds are 7.94% in Large-cap stocks and 12.65% in mid-cap stocks. Hence, it is considered to be a moderately higher-risk fund due to its performance probability.
4. Portfolio Concentration Risk:
This risk is due to some underperforming sectors which may have major investments in large and mid-cap funds. This risk is best mitigated by an active fund manager who can effectively diversify to profit-making sectors by utilising correct market opportunities. However, diversification may not always be the saviour if not done in the right sector.
5. Passive Fund Management Risk:
In case a fund is managed passively by just replicating the benchmark index and investing in similar securities in the same proportion as the Sensex, you might not be able to take advantage of market dynamics and actively trade for a better return. The Fund managers will have restricted access to trading impacting final fund performance.
Strategies to Minimise Risk
If you are an investor who looks forward to a substantial return and is willing to tolerate moderate risks, funds like Motilal Oswal Large & Midcap Fund are ideal to have in your portfolio. Just remember to manage your risks effectively with these techniques:
1. Diversification strategy: Large and mid-cap funds often tend to invest in varied industries. If you want to cushion against sector-specific risks, you should allocate your portfolio to diverse segments.
2. Active Review of Investments: Just as your child needs your regular attention and supervision, so does your portfolio. A periodic review of your portfolio not only helps in identifying underperforming assets but also realigns your investments with your financial objectives.
3.Tenure of Investment: "Patience is a virtue", especially when it comes to large and mid-cap funds. No doubt they are affected by market movements, but over an extended time, they have been found to have the potential to deliver significant returns compared to the risk taken.
4. Investor Risk Appetite: Resilience is the key to investing in large and mid-cap funds as they are categorised under moderately high-risk funds. Your risk-taking capacity, financial objectives and the disposable investible amount should be factored in before any investment decision is taken.
Top of The Charts

Summing Up...
It can be concluded that these funds are apt if you seek long-term and stable growth in your portfolio. Your ability to proactively navigate through market risks, liquidity risks, fund performance risks and sector concentration risks will definitely affect your returns. Added to it your financial goals and risk tolerance limit in terms of your financial stance will help in developing a well-allocated, active portfolio driven by minimal risk.
(ADVERTORIAL DISCLAIMER: The above press release has been provided by VMPL. ANI will not be responsible in any way for the content of the same)