Market volatility is an inevitable part of investing. Fluctuations in stock prices caused by economic uncertainty, interest rate changes, and global events can make investors anxious. However, volatility is also what creates opportunities for long-term wealth creation. Among various mutual fund categories, large and midcap funds stand out for their ability to balance stability with growth potential.
Large and midcap funds invest in both established large-cap companies and high-growth midcap firms. This combination allows them to weather market turbulence better than pure midcap or small-cap funds while still offering higher returns than conservative large-cap funds. In times of volatility, these funds can provide both protection and growth — making them a suitable choice for investors seeking long-term value.
Let’s explore how large and midcap mutual funds perform during market ups and downs, their resilience strategies, and what investors should expect during uncertain times.
Understanding Large & Midcap Funds in Volatile Markets
Large and midcap funds follow a dual investment approach that blends stability and growth. According to SEBI, these funds must allocate at least 35% of their corpus each to large-cap and midcap companies. This balance allows them to perform more steadily when markets fluctuate.
During volatile phases, large-cap holdings act as a safety net because they are well-established companies with robust balance sheets and strong management. Midcap holdings, meanwhile, add growth momentum when markets recover. This dual benefit enables large and midcap funds to ride out volatility with less stress compared to purely midcap funds.
Role of Large-Cap Stocks in Providing Stability
Large-cap stocks are the backbone of large and midcap funds, especially during market corrections or downturns. These companies, often industry leaders, have stable earnings, high liquidity, and established investor trust.
Resilience During Market Decline
Large-cap companies such as HDFC Bank, Infosys, or Reliance Industries tend to experience smaller price swings during market downturns. Their strong fundamentals help cushion the fund’s overall value when midcaps underperform.
Steady Dividends and Cash Flow
Large-cap firms usually offer regular dividends and have predictable cash flows, which bring stability to the fund’s portfolio during uncertain market periods.
Institutional Support and Liquidity
Institutional investors often continue investing in large-cap stocks even during volatility, keeping their prices relatively stable and maintaining liquidity for mutual fund managers.
Confidence in Long-Term Growth
Investors trust large-cap names, and this confidence reflects in the fund’s performance as these companies recover faster when markets stabilize.
Midcap Stocks as a Source of Growth Recovery
While large caps provide stability, midcap stocks add the much-needed growth component. They are typically companies in their expansion phase, benefiting from economic growth and innovation trends.
High Growth Potential
Midcap companies tend to outperform large caps during recovery phases because they grow faster when the economy rebounds.
Opportunity for Higher Returns
Though more volatile, midcap exposure helps boost the fund’s return potential once market sentiment improves. This can help the overall portfolio outperform during bull markets.
Sectoral Advantage
Many midcap firms belong to emerging sectors such as manufacturing, infrastructure, and technology, which often lead the market recovery after downturns.
Fund Manager’s Role
Experienced fund managers can identify quality midcaps that remain undervalued during volatility, positioning the portfolio for strong future returns.
Performance of Large & Midcap Funds in Past Volatile Phases
Looking at historical market movements gives investors valuable insights into how large and midcap funds perform when volatility strikes.
COVID-19 Market Crash (2020)
During the early 2020 crash, large and midcap funds saw short-term declines. However, the large-cap portion protected portfolios from severe drawdowns, while the midcap exposure helped them outperform large-cap-only funds in the subsequent recovery.
Rising Interest Rate Cycle (2022)
When interest rates increased globally in 2022, most equity categories experienced volatility. Large and midcap funds again showed balanced resilience, delivering moderate corrections but recovering faster once markets stabilized.
Post-Pandemic Bull Run (2021–2023)
As the economy rebounded, midcap stocks surged, helping large and midcap funds deliver strong three-year returns. The dual exposure allowed these funds to benefit from both safety and momentum.
Risk Management Strategies During Volatility
Professional fund managers employ various strategies to handle volatility and protect investor capital.
Diversification Across Sectors
Large and midcap funds spread investments across multiple sectors — like banking, IT, pharma, and energy — reducing the impact of downturns in any one sector.
Dynamic Asset Allocation
Fund managers adjust weightage between large and midcap stocks based on market conditions. During uncertain periods, they lean toward large caps for safety; during recoveries, they increase midcap exposure.
Focus on Quality and Fundamentals
Funds focus on financially sound companies with strong earnings visibility, healthy balance sheets, and competitive advantages to withstand market shocks.
Cash Holding and Tactical Moves
Some funds maintain small cash reserves during high volatility, enabling them to buy quality stocks at lower valuations when markets correct.
Investor Behavior and Long-Term Discipline
While fund managers play a role in managing volatility, investors must also adopt the right mindset to navigate such periods.
Avoid Panic Selling
Volatility can trigger fear-driven selling. However, exiting during market lows locks in losses and prevents participation in recovery.
Continue SIP Investments
Systematic Investment Plans (SIPs) help average out purchase costs over time, turning volatility into an advantage through rupee cost averaging.
Focus on Long-Term Goals
Large and midcap funds are designed for 5–10 year horizons. Short-term fluctuations are less relevant compared to long-term wealth creation potential.
Rebalance Periodically
Investors should review portfolios annually and rebalance to maintain desired exposure levels between equity categories.
Factors That Influence Fund Performance During Volatility
Several macroeconomic and market-specific factors determine how large and midcap funds behave during uncertain periods.
Economic Growth Trends
When GDP growth slows, midcap performance tends to decline faster, but large caps maintain stability.
Corporate Earnings Cycle
Consistent earnings growth in large-cap firms supports fund NAV during volatile periods.
Interest Rate Movements
Higher interest rates generally impact midcaps more, but funds with balanced allocation can mitigate this risk.
Global Market Sentiments
Events like oil price hikes or geopolitical tensions affect market sentiment, but large and midcap funds manage this better due to diversification.
Conclusion
Large and midcap mutual funds perform impressively during volatile markets because of their unique structure that combines the stability of large-cap companies with the growth potential of midcaps. While they are not immune to short-term fluctuations, their balanced portfolio design helps minimize losses and ensures faster recovery when markets rebound.
For investors who prefer a mix of safety and growth, large and midcap funds remain one of the most reliable equity categories during uncertainty. Maintaining discipline, staying invested through volatility, and focusing on long-term goals can help investors achieve consistent wealth creation despite market swings.
FAQs about Large & Midcap Funds
What makes large and midcap funds resilient during market volatility?
Their balanced allocation between stable large caps and high-growth midcaps provides both protection and recovery potential.
Do large and midcap funds lose value during a market crash?
Yes, they may see short-term declines, but large-cap exposure cushions the fall and helps in quicker recovery.
Are large and midcap funds riskier than large-cap funds?
They carry slightly higher risk due to midcap exposure but offer better long-term returns.
How long should I stay invested in a large and midcap fund?
Ideally, a 5–7 year horizon helps smooth out volatility and maximize compounding benefits.
Is it good to continue SIPs during volatile markets?
Yes, continuing SIPs during volatility helps accumulate more units at lower prices and improves long-term returns.
Also Read: Top 7 Large & Midcap Mutual Funds
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Disclaimer:
This content is for educational purposes only. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing or consult your financial advisor.