"Should I invest in large cap or mid cap funds?"
This is one of the most common questions we hear in our WhatsApp community at Belong. And honestly, the answer isn't straightforward.
Large caps delivered 6.5% average returns in 2025. Mid caps delivered just 1.9% in the same period. (Outlook Money)
But zoom out to 10 years, and Nifty Midcap 150 has outperformed Nifty 50 in most rolling periods. (Freefincal)
Confusing? That's the point. One-year numbers tell you almost nothing about which fund category suits your goals.
This guide breaks down the real differences between large cap and mid cap mutual funds. We'll look at returns, risk, volatility, expense ratios, and most importantly, which one makes sense for your specific situation as an NRI investor with a long-term horizon.
What SEBI Says: The Official Definitions
Before comparing anything, let's be clear about what we're comparing.
SEBI (Securities and Exchange Board of India) standardized mutual fund categories in 2017. The definitions are based on market capitalization rankings:
Large Cap Companies: Ranked 1st to 100th by full market capitalization. Think Reliance, TCS, HDFC Bank, Infosys. These are India's biggest, most established businesses. (SEBI Circular)
Mid Cap Companies: Ranked 101st to 250th by market capitalization. These are companies like Persistent Systems, Indian Hotels, Voltas. They've survived the startup phase but haven't yet become giants. (SEBI Circular)
Large Cap Funds: Must invest at least 80% of assets in large cap stocks.
Mid Cap Funds: Must invest at least 65% of assets in mid cap stocks.
This standardization means when you buy a large cap fund from any AMC, you know exactly what universe of stocks the fund manager can pick from. No more confusion about whether a fund calling itself "bluechip" actually invests in blue chips.
👉 Tip: AMFI publishes an updated list of large, mid, and small cap stocks every six months. Fund managers must follow this list for their allocation decisions.
The Returns Question: Who Wins Over Time?
Let's address what everyone wants to know first: which category gives better returns?
Short Answer: Mid caps have historically delivered higher returns over long periods, but with significantly more volatility along the way.
The Data:
Over the past 5 years:
Over 10-year rolling periods, Nifty Midcap 150 TRI has outperformed Nifty 50 TRI in most instances. A research study found that Nifty Midcap 150 TRI outperformed Nifty 50 TRI in 10 out of the last 15 calendar years. (Motilal Oswal)
But here's what those headline numbers hide.
2025 Reality Check:
- Large cap category average: 6.5%
- Mid cap category average: 1.9%
- Small cap category average: -4.4%
In a year when markets corrected, large caps held up much better. Mid caps gave back much of their previous gains.
This is the pattern: mid caps run faster in bull markets and fall harder in corrections. Large caps are steadier in both directions.
Risk and Volatility: The Numbers Most People Ignore
Returns without context are dangerous. A fund that gave 25% returns but fell 45% along the way is very different from one that gave 18% with only a 20% drawdown.
Standard Deviation Comparison:
Standard deviation measures how much a fund's returns vary from its average. Higher number = more volatility.
Category | Typical Standard Deviation |
|---|---|
Large Cap Funds | 11-14% |
Mid Cap Funds | 15-18% |
Small Cap Funds | 18-22% |
(Dezerv)
A top mid cap fund like Nippon India Growth Fund shows a standard deviation of approximately 15.20% with a Sharpe ratio of 0.37. (Equitymaster)
Maximum Drawdown:
This measures the largest peak-to-trough fall. During the 2020 Covid crash:
- Nifty 50 fell approximately 35%
- Nifty Midcap 150 fell approximately 40-45%
During the October 2024 to March 2025 correction:
- Large caps corrected 10-12%
- Mid caps corrected 15-20%
What does this mean practically? If you invested Rs 10 lakh in mid cap funds at the September 2024 peak, you might have seen it become Rs 8-8.5 lakh by early 2025. That's a paper loss of Rs 1.5-2 lakh.
Can you watch that happen without panicking? That's the real question.
👉 Tip: If a 30% temporary drop in your portfolio would keep you up at night, large caps are probably a better fit than mid caps.
The Probability of Negative Returns
Here's data that rarely gets discussed.
Research on rolling returns shows the probability of getting negative returns varies significantly by holding period:
Mid Cap Funds:
- 1-year holding: High probability of negative returns
- 3-year holding: Moderate probability of negative returns
- 5-year holding: Lower probability
- 7+ year holding: Much lower probability
(Dezerv)
Large Cap Funds:
- Generally lower probability of negative returns across all periods
- Recover faster from drawdowns
This is why minimum investment horizons matter:
- Large cap funds: Minimum 5 years, ideally 7-10 years
- Mid cap funds: Minimum 7 years, ideally 10+ years
If your goal is 3-4 years away, mid caps are risky. Large caps are safer but still not ideal. You should probably be in debt funds or hybrid funds instead.
Expense Ratios: The Hidden Return Killer
Expense ratio is the annual fee charged by the fund. It's deducted from your returns, so lower is always better.
Typical Expense Ratios:
Category | Direct Plan Range | Regular Plan Range |
|---|---|---|
Large Cap | 0.3-0.8% | 1.0-2.0% |
Mid Cap | 0.4-1.0% | 1.2-2.2% |
Why are mid cap funds more expensive? Because researching mid-sized companies requires more effort. There's less analyst coverage, less publicly available information, and fund managers need to do more groundwork.
The Impact Over Time:
On a Rs 10 lakh investment growing at 12% annually:
- 0.5% expense ratio over 20 years: Final value Rs 89.5 lakh
- 1.5% expense ratio over 20 years: Final value Rs 72.2 lakh
That's a Rs 17.3 lakh difference from just 1% higher annual fees.
Always choose Direct plans over Regular plans. The expense savings compound significantly over long periods.
👉 Tip: A 1% difference in expense ratio might seem small. Over 20 years on Rs 50 lakh, it's Rs 8-10 lakh difference. Always choose Direct plans.
When Large Caps Make More Sense
Large cap funds are better suited if:
Your investment horizon is 5-7 years. Large caps have a higher probability of positive returns over shorter equity timeframes. If you need money for a child's education in 6 years, large caps are safer.
You're a conservative equity investor. You want equity exposure but don't want extreme volatility. You prefer sleeping well over maximizing returns.
You're building your core portfolio. Financial advisors typically recommend large caps form 40-60% of your equity allocation. They provide the stable foundation.
You're close to retirement. If you're 50+ and planning to return to India in 5-8 years, you can't afford a 40% drawdown right before you need the money.
Markets are expensive. When valuations are stretched (Nifty PE above 22-23), large caps typically fall less during corrections. They're relatively defensive.
You prefer passive investing. Large cap index funds have very low expense ratios (0.1-0.3%) and often outperform actively managed large cap funds. Active fund managers struggle to beat the Nifty 50 consistently.
When Mid Caps Make More Sense
Mid cap funds are better suited if:
Your investment horizon is 10+ years. This gives you time to ride out multiple market cycles and capture the compounding benefit of higher growth.
You have high risk tolerance. You can watch your portfolio drop 30-40% and not panic-sell. Emotional fortitude is essential for mid cap investing.
You're young and accumulating wealth. A 30-year-old NRI with a 25-year investment horizon can afford to take more risk for potentially higher returns.
You already have a stable large cap core. Mid caps work as a satellite allocation, not as your entire equity portfolio.
You're investing via SIP. Rupee cost averaging helps smooth out mid cap volatility. You buy more units when prices fall, which benefits you when markets recover.
You believe in India's growth story. Mid cap companies are often tomorrow's large caps. They're in sectors like manufacturing, healthcare, and specialty chemicals that benefit from India's economic expansion.
What the Research Shows About Market Cycles
A 2025 academic study compared HDFC Large Cap Fund and Motilal Oswal Mid Cap Fund across market cycles from 2014-2024. (ResearchGate)
Bull Phase (2014-2017):
- Mid cap fund achieved returns of 0.570 (below benchmark of 0.682)
- Large cap fund outperformed its benchmark (0.367 vs 0.322)
Bear Phase (2018-2020):
- Both funds showed negative Sharpe ratios and alphas
- Large cap fund exhibited greater downside protection
Recovery Phase (2021-2024):
- Mid cap fund demonstrated steeper growth
- Significantly outperformed its benchmark
- Gap between fund and benchmark widened considerably
The pattern is clear: large caps protect better during downturns, mid caps accelerate faster during recoveries.
If you can stay invested through the full cycle, mid caps reward patience. If you might need to exit during a downturn, large caps are safer.
👉 Tip: The worst time to sell mid caps is during a correction. If you might need money at an unpredictable time, keep that portion in large caps or debt.
A Framework for NRI Investors
As NRIs, you have additional factors to consider beyond just returns and risk.
Currency Consideration
The rupee has depreciated 3-4% annually against the dollar over the past decade. (RBI)
If you're investing rupee earnings, this doesn't matter. But if you're converting dollars or dirhams to invest in India, your actual returns in your home currency will be lower.
Higher volatility + currency depreciation can create uncomfortable short-term paper losses.
Tax Efficiency
Both large cap and mid cap funds have the same tax treatment for NRIs:
- Short-term capital gains (under 1 year): 20%
- Long-term capital gains (over 1 year): 12.5% above Rs 1.25 lakh exemption
TDS is deducted at source on redemptions.
The tax treatment doesn't favor one category over another. But frequent switching between funds triggers taxes each time. Long-term holding is tax-efficient regardless of which category you choose.
Repatriation Planning
If you're planning to return to India within 5-7 years, your effective investment horizon is shorter than you think.
You'll need to redeem or reorganize your portfolio around your return date. This argues for more large cap allocation as that date approaches.
FATCA Restrictions
If you're a US or Canada-based NRI, many Indian AMCs don't accept investments due to FATCA compliance requirements. (SEBI)
This limits your fund choices. Before comparing large vs mid cap, check which funds actually accept your investment.
GIFT City mutual funds offer an alternative with zero capital gains tax for NRIs, though fund selection is more limited.
The Combined Approach: Why Not Both?
The large cap vs mid cap debate often misses the point. For most long-term investors, the answer isn't either/or. It's both, in the right proportion.
A Sensible Allocation Framework:
Investor Profile | Large Cap | Mid Cap | Rationale |
|---|---|---|---|
Conservative (50+, returning in 5 years) | 70-80% | 20-30% | Stability priority |
Moderate (35-50, 10-15 year horizon) | 50-60% | 40-50% | Balanced growth |
Aggressive (Under 35, 20+ year horizon) | 30-40% | 60-70% | Growth priority |
This framework assumes you also have debt allocation appropriate for your age and goals. Equity allocation itself should typically be (100 minus your age) percent of your portfolio.
The Core-Satellite Approach:
One popular strategy:
- Core (60-70%): Large cap index fund or flexi cap fund
- Satellite (30-40%): Mid cap fund for growth boost
The core provides stability and market returns. The satellite aims to outperform.
If the satellite underperforms, your core protects you. If it outperforms, you capture the upside.
👉 Tip: Don't hold 3-4 large cap funds. They all own similar stocks. One good large cap fund (or index fund) is enough. Same applies to mid caps.
Should You Use Index Funds Instead?
This is a valid question, especially for large caps.
Large Cap Space:
Most actively managed large cap funds fail to consistently beat the Nifty 50 index. The top 100 companies are heavily researched by analysts. Finding mispriced stocks is difficult.
A Nifty 50 index fund with 0.1-0.2% expense ratio often delivers better returns than an active large cap fund charging 0.8-1%.
For large cap exposure, index funds are a strong choice.
Mid Cap Space:
The case for active management is stronger here. Mid cap companies have less analyst coverage. A skilled fund manager can find undervalued opportunities.
The Nifty Midcap 150 index exists, and index funds tracking it have performed well. But the best active mid cap funds have generated meaningful alpha (excess returns above benchmark).
If you're choosing an active mid cap fund, look for consistent rolling returns and low expense ratios. Funds like Kotak Emerging Equity (0.43% expense, strong risk-adjusted returns) balance cost and performance well.
How to Actually Implement This
Step 1: Determine Your Equity Allocation
Based on age and goals. If you're 40, consider 60% equity, 40% debt as a starting point.
Step 2: Split Equity Between Categories
Use the framework above based on your risk profile and horizon.
Step 3: Select Funds
For large caps: Consider a Nifty 50 index fund (UTI Nifty 50, HDFC Index Fund Nifty 50) or a consistent active fund (Canara Robeco Bluechip, ICICI Prudential Large Cap).
For mid caps: Look for funds with strong 5-year rolling returns, reasonable expense ratios, and experienced fund managers. HDFC Mid-Cap Opportunities, Kotak Emerging Equity, and Nippon India Growth Fund are category leaders.
Step 4: Start SIPs
SIP investing works especially well for mid caps. The volatility that hurts lump sum investors helps SIP investors through rupee cost averaging.
Step 5: Rebalance Annually
If mid caps run up significantly, your allocation drifts. Rebalance back to target once a year.
The GIFT City Alternative for NRIs
Here's something most large cap vs mid cap articles won't tell you.
GIFT City mutual funds offer NRIs zero capital gains tax on redemptions. (IFSCA)
Regular Indian mutual funds charge 12.5-20% tax on gains. On a Rs 50 lakh gain, that's Rs 6.25-10 lakh in taxes saved.
GIFT City funds are denominated in USD, which also eliminates currency conversion timing decisions.
Funds like Tata India Dynamic Equity Fund offer dynamic asset allocation. They automatically adjust between large, mid, and small caps based on market conditions.
For NRIs investing significant amounts with long horizons, the tax savings alone justify exploring GIFT City options.
Use Belong's Mutual Funds Explorer to compare available funds.
Common Mistakes to Avoid
Chasing Last Year's Returns
The mid cap fund that gave 35% last year might give -5% next year. Look at 5-year rolling returns across multiple periods, not just trailing returns.
Holding Too Many Funds
Five large cap funds don't give you diversification. They all hold HDFC Bank, Reliance, and Infosys. You just create tracking complexity.
1-2 large cap funds + 1-2 mid cap funds is plenty for most investors.
Stopping SIPs During Corrections
SIP stoppage ratio hit 128% during the October 2024-March 2025 correction. More investors stopped SIPs than started them. (Outlook Money)
This is exactly backwards. Corrections are when SIPs work best. You're buying more units at lower prices.
Ignoring Expense Ratios
A 1.5% expense ratio fund needs to beat a 0.5% expense ratio fund by 1% annually just to match returns. Over 20 years, that compounds to lakhs.
Not Using Direct Plans
Regular plans pay distributor commissions from your returns. Direct plans don't. The 0.5-1% annual savings is free money.
Make Your Decision
The large cap vs mid cap question doesn't have one right answer. It depends on your timeline, your risk tolerance, and your ability to stay invested through market cycles.
What we can say definitively:
- Large caps for stability and shorter equity horizons (5-7 years)
- Mid caps for growth and longer horizons (10+ years)
- Both together for most long-term investors
Don't overthink the exact allocation. Starting matters more than optimizing.
If you're still unsure which approach suits your situation, join our WhatsApp community where NRIs discuss exactly these questions daily. Get perspectives from others who've made similar decisions.
Download the Belong app to explore GIFT City mutual funds with zero capital gains tax, compare NRI FD rates as an alternative to equity, and use our Compliance Compass to ensure your investments are fully compliant.
The best time to start was years ago. The second best time is now.
Author: Ankur Choudhary & the Belong Team IIT Kanpur alumnus, SEBI-registered investment advisor, and co-founders of Belong, helping NRIs make smarter financial decisions.
Published: December 2025
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