When it comes to investing, mutual funds can be a very investor-friendly option due to the low cost of investment and transparency around the underlying securities. For long-term financial goals, financial advisors typically recommend investing in equity mutual funds. These funds can be further classified on the basis of market capitalisation, which is also a categorisation of listed companies.
An introduction to market capitalisation
The total value of shares of a company determines if it falls in to the broad categories of small-cap, mid-cap, or large-cap. When a company’s shares are available for public trading, the total value of that company’s outstanding shares in the market is called market capitalisation.
For instance, if a company has priced each share at Rs. 30 and if its total number of outstanding shares in the market is 50,000, the market capitalisation of this company can be calculated with the help of this formula –
Price per share x total number of outstanding shares
Rs. 30 x 50,000 = Rs. 15,00,000
Therefore, the market capitalisation of that company is Rs. 15,00,000 as of that day.
What are large-cap, mid-cap, and small-cap mutual funds?
These are the funds that invest in shares of small-cap companies. These companies usually:
- Are significantly smaller in size, relative to large- and mid-cap companies
- Could have an opportunity for high growth in instances where an economy or a particular sector is emerging from recession or a low-growth phase
- Carry high risk for an investor, as these companies may or may not be successful over time
These are mutual fund schemes that invest in shares of mid-cap companies. These companies usually:
- Are larger than small-cap companies, but smaller than large-cap companies
- Are perceived to be less risky than small-cap ones but more than large-cap companies, from an investment point of view
These mutual funds predominantly invest in shares of large-cap companies. Such companies are:
- Often referred to as Blue Chip companies, particularly when they make it to the top 50 or 30 companies basis market capitalisation
- More likely to have a relatively stable business operations during any negative impact on the economy, when compared to mid-cap and small-cap companies
- Are perceived to be the least risky among different equity categories
It is important to keep in mind that the performance of companies that have small-cap, mid-cap, or large-cap funds varies based on the economic environment and developments over time, and there cannot be any guarantee of risk-free returns from either of them.
Small-cap, mid-cap, and large-cap funds: How do they differ?
The differences between large-cap, mid-cap, and small-cap have been discussed below across several verticals:
|Large-cap||Invests minimum 65% of Assets Under Management in companies with a market cap of Rs. 20,000 crore or more|
|Mid-cap||Invests minimum 65% of Assets Under Management in shares of companies with a market cap of less than Rs. 20,000 crore; with a lower cap limit of Rs. 5,000 crore|
|Small-cap||Invests more than 65% of the Assets Under Management in shares of companies with a market cap of less than Rs. 5,000 crore|
|Growth potential (subject to market volatility & term of investment) and risk associated|
|Large-cap||Low growth potential, with relatively lower risk compared to mid-cap and small-cap|
|Mid cap||Moderate growth potential and risk relative to the other categories of equity mutual funds|
|Small-cap||High growth potential and risk relative to large- and mid-cap funds|
|Large-cap||Relatively low volatility as prices remain more or less stable even amidst major changes in the economy|
|Mid-cap||Slightly more volatile than large-cap funds|
|Small-cap||Highly volatile as the price fluctuates majorly according to the economic situation, or even industry specific trends|
Different mutual fund schemes come with a different level of risk and growth potential. It is prudent to choose a mutual fund investment for your investments basis your own risk appetite that suits your financial goals.