Large-, mid- or small-cap mutual funds: Where should you invest a lumpsum amid volatile markets?

A market that falls sharply one day and rebounds the next can make investing a large amount tricky. Do you put your money in now, wait for another correction, or spread it across different mutual fund categories?

The Sensex gained 1,109 points on October 13, but remains down 14.27 percent so far this year. While the correction has brought valuations down in several market segments, experts differ on where the better opportunities lie.

Interestingly, not everyone is favouring large-cap funds. Some see greater growth potential in small-caps, while others prefer flexi-cap, multi-cap and multi-asset funds.

Large-, mid- or small-cap: Where is the better opportunity?

Experts have different views on which categories look attractive right now and how much your investment horizon should influence that choice.

Sandeep Bagla, CEO of TRUST Mutual Fund, believes small-cap funds offer considerable long-term growth potential, particularly for investors who can stay invested through market volatility.

“Small-caps seem to be most promising, but with a long-term horizon,” he said, pointing to emerging sectors, newer business models and the wider range of growth opportunities among smaller companies.

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But there is a contrasting view.

Ajay Kumar Yadav, Group CEO and CIO at Wise Finserv, prefers large-cap funds, followed by flexi-cap and large & mid-cap funds, largely because of the relative valuation advantage.

“The Nifty 50 trades at around 19.1 times trailing earnings, compared with 28.1 times for the Nifty Midcap 150 and 34.4 times for the Nifty Smallcap 250,” he said, citing October 12 valuations.

“The case for large-caps has improved quite a bit after the correction,” Yadav said. Their estimated forward P/E of 17.6 times is also below the historical average of 20.9 times.

The relatively attractive valuations of larger companies are also influencing how some experts view mid- and small-cap opportunities.

Sandip Jha, Chief Product Officer at Godrej Wealth, said, “Large caps offer the best mix of improving earnings growth and valuation comfort, while midcaps continue to provide attractive growth opportunities at reasonable valuations.”

However, he remains cautious about fresh lumpsum exposure to small-cap and micro-cap funds, citing relatively rich valuations, limited margin of safety and greater differences in stock performance.

Flexi-cap, multi-cap and value funds: Opportunities beyond market-cap bets

For investors who do not want to concentrate their investments in one market-cap segment, diversified categories offer another route.

Bagla also favours flexi-cap and multi-cap funds for investors seeking a more balanced portfolio, as these categories provide exposure across market capitalisations.

Another approach is to look beyond market-cap-based categories altogether.

Protima Dhawan, Director and Unit Head at Anand Rathi Wealth says, “Investors can consider active, diversified equity categories, such as market-cap-based, flexi-cap, multi-cap, focused and value funds.”

“These categories provide exposure across market segments and sectors, helping reduce concentration risk while allowing investors to participate in different market cycles,” she explained.

Unlike flexi-cap funds, multi-cap funds must maintain at least 25 percent exposure each to large-, mid- and small-cap stocks.

What about multi-asset and balanced advantage funds?

Investors looking beyond pure equity funds also have categories that spread investments across different asset classes.

Lt Col Rochak Bakshi, CFP, at Trunor Enterprises, said, “Considering the current geopolitical landscape, where we cannot be sure of the next 6 to 12 months, the most attractive place to deploy a lumpsum is the multi-asset category.“

His preference comes from relatively lower large-cap valuations and opportunities across other asset classes, including precious metals.

Balanced advantage funds offer another option, with their ability to adjust equity and debt exposure according to the scheme’s investment strategy.

Also read: Small-cap mutual funds attract Rs 9,039 crore in September, highest among equity categories

Invest everything now or stagger the lumpsum?

Choosing the category is one part of the decision. Investors also need to decide whether to deploy their entire amount immediately or spread it over time.

“I wouldn’t put the entire amount into the market on one day, but I wouldn’t sit on cash waiting for another big correction either,” explains Yadav. “Investing around 40 percent immediately and spreading the remaining 60 percent over the next three to six months,” he further adds.

A different approach is to use a systematic transfer plan (STP), where money is gradually moved from a debt fund into equity funds.

Dhawan recommends weekly transfers over six to eight weeks instead of deploying the entire amount at once, helping spread purchases across different market levels.

Which categories warrant caution?

While opportunities exist across categories, sectoral and thematic funds are an area where investors may need to be particularly selective.

Bagla is cautious about these funds because sector performance tends to be cyclical. Investors often enter after seeing strong past returns, potentially catching a sector near the peak of its cycle.

The choice of mutual fund category therefore depends not just on how far markets have fallen, but also on earnings prospects, valuations, investment horizons and the risks involved.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.