LARGECAP, MIDCAP AND SECTORAL/THEMATIC FUNDS ……. UNDERSTANDING MUTUAL FUNDS

LARGECAP, MIDCAP AND SECTORAL/THEMATIC FUNDS ……. UNDERSTANDING MUTUAL FUNDS 

 

The synergy of Multi – cap funds exists because of the scale of Large Caps and the future scope in the Mid Cap stocks

 

The present scenario in India is outlined by

• Improving Economic Fundamentals
• Stable Government dedicated to improving the governance in the country
• Decreasing current account deficit
• Stable currency
• And increasing workforce of teenage population

The improving economic fundamentals can be explicitly seen by the trend in Fiscal Deficit and current account Deficit both stabilizing and slowly reducing to manageable levels. From a high of 6.5% and 2.8% of GDP in FY 2010, it has slowly come down to 4.1% and 1.6% of GDP in FY 2015. This has also lead to increased FII and DII participation in Indian markets.

 

The inflation has also been reined in by prudent policy dynamics by RBI. The corporate earnings are also expected to show improvement by H1 FY 2016 and augur well for the Indian Inc.

 

India appears well placed due to Political stability, Demographic dividend, being a saver’s nation and urbanization trend.

 

HOW TO PARTICIPATE

 

There has been increase in retail investor participation in the equity market specially through mutual fund route but it still is not commensurate to the growing earning population. There are still many fence sitters who though convinced about equities are concerned regarding what to choose. So what are the options within the Mutual Funds ….

• Large Caps
• Mid Caps
• Multi Caps
• Sectoral or Thematic

 

Let’s understand these categories …

 

LARGE CAPS

 

These are defined by certain characteristic advantages which defines their nature like…

• Matured Businesses (Stability and visibility)
• Large Scale Operations (Low marginal cost)
• Large Balance Sheets (Exposure to capital intensive businesses)
• Capital Efficiency (Leverage at competitive costs)
• Provide High Floating Stock (High Liquidity)
• Generally have Good corporate Governance (Trustworthy Managements)

 

What do Large Caps offer?

 

CHARACTERISTICS		LARGE CAPS
DIVERSIFICATION	STOCK LEVEL	50 STOCKS
	SECTOR LEVEL	12 SECTORS
	MARKET CAP RANGE (INR)	13K – 501K Crs
RETURN POTENTIAL	BULL MARKET	MODERATE
DOWNSIDE RISK	BEAR MARKET	RELATIVELY LOWER
VOLATILITY	AS PER STANDARD DEVIATION	RELATIVELY LOWER

 

 

 

So Large Caps are good for a risk averse investor who is looking for a stable return in the medium to long term with very little downside risk (potentially Nil in the long term). This is the best place to park your long term pension funds or savings for future needs. Over a period of 5 Yrs or more one can expect a decent return of 15% - 20% CAGR.

 

 

MID CAPS

 

The Mid Caps are established small businesses which are growing, having potential to turn into Large Caps and provide variety. These are characterized by

 

• Growth with the sector growth ( Potential Big Fish in growing pond)
• Growth by increasing market share (Small fish in Big pond)
• Grow initially due to unique proposition and later as per sector growth (Different Fish in different pond)
• Medium size businesses in large sectors (One can gain by participating in growth phase of company)
• Entrepreneurship led businesses ( Giving you opportunity to participate in promising prospects at an early stage)

 

What Do Mid Caps Offer?

 

CHARACTERISTICS		MID CAPS
DIVERSIFICATION	STOCK LEVEL	100 STOCKS
	SECTOR LEVEL	17 SECTORS
	MARKET CAP RANGE (INR)	0.49K – 72K Crs
RETURN POTENTIAL	BULL MARKET	RELATIVELY HIGHER
DOWNSIDE RISK	BEAR MARKET	RELATIVELY HIGHER
VOLATILITY	AS PER STANDARD DEVIATION	RELATIVELY HIGHER

 

So Mid Cap Funds are ideally suitable for a young investor who has just started earning and has a very long period of investing years who can fully sustain himself through the market volatility and hence take advantages of higher growth potential. Also for investors who have already created a stable portfolio in terms of savings and investment in Large Cap and looking forward to take some risk for a certain defined percentage of his savings in expectation of higher growth potential.

 

 

THEMATIC OR SECTORAL FUNDS

 

 The Sectoral or Thematic Funds aim to capitalize on the changing economic scenario by identifying potential areas of immediate growth. They are cyclical in nature and have high Risk/Rewards potential.

 

These are characterized by ….

•  Focus on specific sectors/stocks ( Concentrated Bets)
• Identifying the trend is important (Time Sensitive)
• Led by changing landscape of economy or given sector (Function of Fundamental Change)
• Take high conviction bets by investing in appropriate theme/sector
• Possibility of higher potential returns if the opportunity is explored at the right time

  

What do the Thematics/ Sectorals offer?

 

CHARACTERISTICS		THEMATIC/SECTORAL FUNDS
DIVERSIFICATION	STOCK LEVEL	DIFFERENT INDICES HAVE DIFFIRENT CHARACTERSTICS
	SECTOR LEVEL
	MARKET CAP RANGE (INR)
RETURN POTENTIAL	BULL MARKET	RELATIVELY HIGHER
DOWNSIDE RISK	BEAR MARKET	RELATIVELY HIGHER
VOLATILITY	AS PER STANDARD DEVIATION	RELATIVELY HIGHER

 

 These Thematic/Sectoral Funds are suitable for investors who understand the economic developments taking place and ready to take risk with conviction. They offer a very high Risk/Reward potential.

  

ANALYISING ALL THE OPTIONS AVAILABLE

  

CHARACTERISTICS		LARGE CAPS	MID CAPS	THEMATIC/SECTORAL
DIVERSIFICATION	STOCK LEVEL	50 STOCKS	100 STOCKS	DIFFERENT INDICES HAVE DIFFERENT CHARACTERISTICS
	SECTOR LEVEL	12 SECTORS	17 SECTORS
	MARKET CAP LEVEL	13K – 501K Crs	0.49K – 72K Crs
RETURN POTENTIAL	BULL MARKET	MODERATE	RELATIVELY HIGHER	RELATIVELY HIGHER
DOWNSIDE RISK	BEAR MARKET	RELATIVELY LOWER	RELATIVELY HIGHER	RELATIVELY HIGHER
VOLATILITY	AS PER STANDARD DEVIATION	RELATIVELY LOWER	RELATIVELY HIGHER	RELATIVELY HIGHER

 

  

MULTI CAP FUNDS

 

Multi Cap Funds provide an opportunity to take advantages of all types of funds discussed above as per individual investors risk appetite. They provide a diversified basket which includes both Large Caps and Mid Caps. They provide diversification across Sectors, Stocks and Market Caps. They have an inherent Size advantage of Large Caps and Niche advantage of Mid Caps offering diversification, lower downside risk, market resilience and lower volatility.

  

Hope this will help the new investors coming in the market or still sitting on the fence in understanding various products available in the market. Don’t get swayed by the brokers, choose the product as per your risk profile and future goals.

  

Happy Investing