India's mutual-fund industry has witnessed a steady migration of retail investors toward single-fund solutions, with large-and-mid-cap funds emerging as one of the more popular choices. These schemes promise diversified exposure across both large- and mid-capitalisation stocks, allowing investors to avoid the hassle of juggling multiple schemes. Yet a growing body of data suggests that building a parallel portfolio of separate large-cap and mid-cap funds may deliver competitive — and sometimes superior — returns over longer time spans.
An analysis spanning the past one, three, and five years reveals a nuanced picture. Large-and-mid-cap funds posted strong returns during the 2020 to 2023 period when mid-cap equities experienced a sustained bull run. However, when measured against simple hybrid portfolios — essentially holding an equal or proportionate mix of a pure large-cap fund and a pure mid-cap fund — several of these blended schemes began to lag, particularly at the five-year mark.
Fund managers of large-and-mid-cap schemes are required to invest at least 40 percent of assets in large-cap stocks, while the remaining 60 percent must go toward mid-cap equities. Critics argue that this rigid formula can force a fund manager to overweight large caps even when mid-caps appear significantly undervalued, or vice versa, limiting the ability to exploit short-term market dislocations. A do-it-yourself portfolio, by contrast, gives investors full discretion to shift between categories as conditions change.
Performance figures paint a mixed portrait. Over one-year periods, some top-performing large-and-mid-cap funds have narrowly edged out split portfolios, driven primarily by a mid-cap segment that temporarily outperformed its peers. But over three and five-year windows, the gap narrowed considerably. In certain cases, a simple combination of a large-cap index fund paired with a mid-cap actively managed fund matched or surpassed the returns of many large-and-mid-cap offerings. The difference often came down to expense ratios: index-based large-cap components carry significantly lower costs, which compound advantageously over extended periods.
Portfolio allocations further illuminate the divergence. Many large-and-mid-cap funds currently hold a higher concentration of large-cap holdings than the mandatory floor would suggest, reflecting fund managers' caution in volatile markets. When mid-cap valuations became stretched in late 2023 and early 2024, those same funds held relatively few cash reserves to pivot, whereas investors managing a two-fund portfolio could simply reduce mid-cap exposure on their own terms.
Financial planners note that large-and-mid-cap funds remain attractive for first-time equity investors who prefer a hands-off approach, particularly in the systematic investment-plan framework. For seasoned investors comfortable monitoring rebalancing cycles, however, the evidence suggests a split portfolio may offer greater flexibility and cost efficiency without sacrificing diversification.
The Asset Management Association of India has not issued specific guidance on the matter, leaving the decision to individual investors and their advisers. What is clear is that the proliferation of hybrid equity schemes has given consumers more choice — and more homework — than ever before.
