Large-cap funds are the investment made in the supposedly safe companies who are listed in the list of the top 100 companies in the market and at the same time are counted among the leaders in their respective zones. Mid-cap funds are the investments made in medium-scale companies, who earn revenues but are comparatively smaller than the large-caps companies in terms of market share, profit, etc. The companies that are listed between 101 and 250 are usually deemed as mid-cap companies. While the investments which are made in the companies with a capital smaller than the mid-cap companies are known as small-cap funds. Each fund has its own share of positive and negative sides, which deem it fit or unfit for a systematic way of investment like the SIPs.
Small and midcap funds are better for SIPs than the large-cap
An investor with a high to moderate risk appetite can benefit from small and mid-cap investment in SIPs and will be able to draw more returns from the market.
The following makes small and mid-cap funds better for SIPs than large-caps:
There are numerous mid-caps that have a strong holding, robust business model and significant balance sheets; when dug deeper, many mid-cap companies have even out-performed many large-caps stock companies. The medium-sized and small-cap funds spread the risk by diversifying in various schemes.
Risk and volatility are two different concepts; volatility arises due to fluctuation in the Net Asset Value of the funds while risk is the probable chance of incurring a loss. An investor can only incur a loss if he/she decides to redeem their funds. One can avert loss by holding their small and mid-cap funds systematically for a longer period of time.
Though many may consider large-cap companies to be comparatively more reliable than the small and mid-cap companies, their reliability is mostly judged by their balance sheet, profit margin and the rate of returns. Investors must realise that stronger fundamentals cannot be judged by higher profit margins. Numerous small and mid-cap companies also generate ROCE and high cash flow.
The capital-intensive nature and more reliance on debt financing tend to have a high debt and equity ratios which results in the high-interest burden for the large-cap companies and affect their profit margin. The less capital-intensive model and lower debt-equity ratio serve as an advantage for the small and mid-cap companies and enable their investors to generate ROCE and more profits.
An investment in a mid-cap or small-cap has a higher rate of growth potential and can generate high returns at the time of upgrade valuation. While usually, the large-cap funds are traded off at a valuation that ranges between the premium and mid-cap.
The SIP offers the investors of small-cap and mid-cap a freedom from speculating the market conditions. The systematic investment habit helps the investors to earn regular income even during a volatile market situation.
Small and medium cap funds are risky in nature; seek our professional assistance for creating a balanced investment structure.