Market capitalization is a popular way of categorizing mutual funds. Equity mutual funds can be classified into large, mid-cap, and small cap funds based on their investment objective. Market capitalization or market cap is calculated by multiplying the price of one share of a company at the prevailing market price with the shares outstanding. Market cap gives a fair idea about the size of the company.
As an example, a company that has 3 crore shares outstanding with each share priced at Rs. 100 will have a market cap of Rs. 300 crore. It is important for investors to understand the difference between several market capitalization because investing in a company of a specific size is associated with unique opportunities and risks.
The Securities and Exchange Board of India (SEBI), in order to bring uniformity to the mutual fund sphere, has defined large cap, mid cap and small cap as:
- Large cap: Large cap stocks belong to companies, which range from 1st to 100th in terms of full market capitalization, which takes into account shares held by promoters, insiders or the government for the purposes of calculation of market cap.
- Mid cap: Mid cap stocks belong to companies ranging from 101st to 250th in terms of full market capitalization.
- Small cap: Stocks that belong to companies 251st and beyond in terms of full market capitalization.
What are Large-Cap Mutual Funds?
Large cap mutual funds invest in stocks of the top 100 companies in terms of full market capitalization. These are typically old and well established companies that tend to be reputable and trustworthy and are leaders in their segments. Large cap funds invest in companies that have strong corporate-governance practices and can generate wealth slowly and steadily over the long term. These funds must invest at least 80 per cent of their total assets in large cap companies.
Large cap funds tend to be relatively low-risk investments, suited for investors with a long-term perspective as they are considered to be steady compounders and regular dividend payers.
What are Mid-Cap Mutual Funds?
Mutual funds that majorly invest in companies ranking from 101 to 250 in terms of full market capitalization are defined as mid-cap funds. Mid cap funds must invest at least 65 per cent of their total assets in equity and equity related instruments. These funds invest in mid-cap companies that are relatively well-established and stable. They tend to be under-researched and under followed in comparison to large-cap companies, and may outperform their large-cap counterparts given time.
As mid-cap companies are usually on the lookout to expand when suitable growth opportunities present, the underlying stocks may be volatile. These funds are suitable for investors with a higher appetite for risk than large-cap investors.
What are Small-Cap Mutual Funds?
Small-cap funds are those that invest in the 251st company onwards in terms of full market capitalization. SEBI mandates that small cap funds should invest at least 65 per cent of their total assets in equity and equity related instruments of small cap companies. Small cap funds invest in companies that are relatively younger and less stable as compared to large and mid-cap companies. As a result, they have great potential for quick returns for investors looking for aggressive growth. Consequently, they are less stable and carry a much higher risk of going out of business than any large or mid-cap companies.
To Summarize
| Large-Cap Funds | Mid-Cap Funds | Small-Cap Funds | |
| Characteristics | Invest in Top 1-100 Companies | Invest in companies ranked 101 – 250 | Invest in companies ranked 251 and below |
| These funds invest in large companies that offer the potential of capital appreciation over the long term with regular dividend distribution | These funds invest in mid-sized companies that offer the potential of high capital appreciation over shorter time periods, but carry higher investment risk | These funds invest in younger (but less stable) companies with higher grown potential | |
| Risk Level | Relatively Low Risk | High Risk | High Risk |
| Least volatile | More volatile than large-caps | Greater volatility than large and mid-caps | |
| Recommended For | Investors with long-term perspective looking for high quality stocks | Investors with moderate risk appetite who are looking to invest in businesses that have upside potential. | Investors with high risk-taking ability, looking to invest in multibaggers. |
Market capitalization gives investors insights about scheme characteristics and allows them to assess the risks involved. Mutual funds offer a diversified and easy access to companies across various market caps. This means investors can enjoy a high degree of choice in investments while benefiting from professional portfolio management.
