What Are the Benefits and Taxation on Large and Mid-Cap Funds?

Investing in mutual funds offers an efficient way to build wealth over time, and large-cap mutual funds and mid-cap mutual funds are two popular categories that cater to different investment objectives and risk appetites. Both fund types have unique benefits and distinct taxation rules that investors should understand to maximise returns while managing tax liabilities.

This article explores the advantages of these funds and the taxation applicable to them, helping you make informed decisions based on your financial goals.

Understanding large-cap mutual funds

Large cap mutual funds primarily invest in the top 100 companies by market capitalisation. These companies are well-established, financially stable, and have a proven track record of delivering consistent returns. Large-cap funds are considered less risky compared to mid-cap or small-cap funds and are suitable for conservative investors seeking steady growth.

Benefits of large-cap mutual funds

1. Stability in returns: Large-cap companies are less volatile during market downturns, ensuring more stable returns for investors.
2. Lower risk: Due to their financial strength and market dominance, large-cap companies are better equipped to withstand economic challenges, reducing the risk for investors.
3. Liquidity: Investments in large-cap companies are highly liquid, making it easier for fund managers to buy or sell assets.
4. Consistent dividends: Many large-cap companies offer regular dividends, adding to the total returns for investors.
    

Limitations of large-cap mutual funds

1. Lower growth potential: Compared to mid-cap or small-cap funds, the growth potential of large-cap funds is relatively limited.
2. Moderate returns: While stable, the returns may not be as high as those offered by riskier equity funds.
    

Understanding mid-cap mutual funds

Mid-cap mutual funds invest in companies ranked between 101 and 250 in terms of market capitalisation. These companies are typically in their growth phase, offering higher return potential than large-cap companies but with greater risk. Mid-cap funds are suitable for investors with a moderate to high-risk tolerance and a long-term investment horizon.

Benefits of mid-cap mutual funds

1. Higher growth potential: Mid-cap companies have significant room for growth, offering the potential for higher returns compared to large-cap funds.
2. Portfolio diversification: Including mid-cap funds in your portfolio can add diversity, balancing the stability of large-cap funds with the growth of smaller companies.
3. Opportunities for early investment: Mid-cap funds allow investors to benefit from the early growth stages of emerging companies.
4. Long-term wealth creation: With a longer time horizon, mid-cap funds can significantly contribute to wealth accumulation.
    

Limitations of mid-cap mutual funds

1. Higher volatility: Mid-cap stocks are more affected by market fluctuations, making them riskier than large-cap investments.
2. Lower liquidity: Compared to large-cap stocks, mid-cap stocks have lower liquidity, which can impact the fund’s performance during volatile markets.
    

Key differences between large-cap and mid-cap mutual funds

Taxation on large-cap and mid-cap mutual funds

Both large-cap mutual funds and mid-cap mutual funds are classified as equity-oriented funds, and their taxation follows similar rules.

Short-term capital gains (STCG)

• Gains on units held for less than one year are taxed at 15%.
• For example, if you earn Rs. 10,000 in short-term capital gains, you will pay Rs. 1,500 in taxes.
   

Long-term capital gains (LTCG)

• Gains on units held for more than one year are taxed at 10%, but only if the gains exceed Rs. 1 lakh in a financial year.
• For instance, if you earn Rs. 1.5 lakh in long-term capital gains, Rs. 50,000 will be taxable, and you will pay Rs. 5,000 in taxes.
   

Dividend Distribution Tax (DDT)

• Dividends received from mutual funds are added to the investor’s income and taxed as per their income tax slab.
   

Tax-saving tip

Investors can take advantage of SIPs (Systematic Investment Plans) in both large-cap and mid-cap funds to manage tax liabilities more efficiently and benefit from rupee cost averaging.

How to choose between large-cap and mid-cap mutual funds

• Choose large-cap funds if you have a low-risk appetite and prefer stability.
• Opt for mid-cap funds if you are willing to take higher risks for potentially higher returns.
   

Investment goals

• Large-cap funds are ideal for goals like saving for retirement or building a safety net.
• Mid-cap funds are better suited for long-term wealth creation and aggressive financial goals.
   

Time horizon

• Large-cap funds are suitable for investors with a 5–7 year horizon.
• Mid-cap funds require a longer investment period, typically 7–10 years or more.
   

Diversification

Combine both fund types in your portfolio to balance risk and return. A mix of large-cap and mid-cap funds ensures stability during volatile periods while offering growth opportunities.

Benefits of combining large-cap and mid-cap mutual funds

1. Risk diversification: Mitigates the volatility of mid-cap funds with the stability of large-cap funds.
2. Balanced returns: Ensures consistent returns while capitalising on growth opportunities.
3. Comprehensive exposure: Offers a broader exposure to both market leaders and emerging companies.
    

Steps to invest in large-cap and mid-cap mutual funds

1. Define your goals: Determine your financial objectives and time horizon.
2. Assess your risk appetite: Choose funds that align with your comfort level regarding risk.
3. Research fund performance: Compare funds based on past performance, fund manager expertise, and expense ratios.
4. Diversify your portfolio: Allocate investments across both fund types to balance risk and return.
5. Monitor regularly: Periodically review your investments to ensure they remain aligned with your goals.
    

Conclusion

Both large-cap mutual funds and mid-cap mutual funds play essential roles in wealth creation, catering to different risk profiles and investment objectives. While large-cap funds provide stability and consistent returns, mid-cap funds offer higher growth potential at a greater risk. Understanding the benefits and taxation of these funds allows you to make informed decisions and create a well-diversified portfolio. By balancing both types of funds, you can optimise returns and achieve your financial goals over the long term.