Mutual funds are one of the best ways to save and invest money for future returns. Several mutual funds are available based on market capitalization and risk tolerance.
If you are a beginner who is just getting started in the stock market, you may come across stock market jargon such as large-cap funds, mid-cap funds, blue chip companies, and many more. Let us start with the fundamentals and define market capitalization.
Understanding Market Capitalization
Market capitalization refers to the market value of all the shares owned by a company’s shareholders. The stock market determines a company’s worth.
It is also defined as the sum of all outstanding shares’ market value. It is calculated by multiplying the total number of outstanding shares of a company by the current market price of one share, also known as the ‘market cap’.
There are three types of market capitalizations:
What are large-cap, mid-cap, and small-cap companies, and how do they differ? SEBI (Securities Exchange Board of India) established regulations in 2017 to classify companies based on their market capitalization.
The differences in these market capitalizations are now detailed below.
Large-cap Companies
The SEBI has developed company classification criteria. Large-cap companies are the top 100 publicly traded companies in the United States based on market capitalization. ‘Large-cap funds’ refer to mutual funds that invest in large-cap companies.
Large-cap companies typically have a strong track record. These companies have a significant market value (market cap). These are also referred to as ‘blue-chip stocks’. These companies have a market capitalization of Rs.20000 crores or more and a strong market presence.
Mid-cap Companies
SEBI established a rule in 2017 that defines mid-cap companies as those with market capitalizations ranging from 101 to 25000 crore. rupees. These companies’ market capitalizations will range between Rs.5000 and Rs.20000 crores. ‘Mid-cap funds’ are mutual funds that invest in mid-cap stocks.
Mid-cap companies have a similar track record to large-cap companies, but the difference is noticeable. Mid-cap funds take on more risk than large-cap funds. Due to their limited market presence, mid-cap companies may or may not be included in broad market indexes.
Small-cap Companies
Small-cap companies are defined as those ranked 251st or lower in terms of market capitalization. These companies have a market capitalization of less than Rs.5000 crores. ‘Small-cap funds’ are mutual funds that invest in small-cap stocks.
Small-cap companies do not have a long history. A start-up or a company in development, for example, can fall into the small-cap sector. Because of their small market presence, these companies are rarely included in broad market indices.
Let us examine the distinctions between Large-cap, Mid-cap, and Small-cap funds in terms of risk profile, liquidity and volatility, as well as returns and growth.
Differences Between Large, Mid and Small-Cap Funds
Here is the difference between small cap mid cap and large cap based on various factors-
| RISK PROFILE | |
| Large-cap funds | Large-cap funds have a lesser risk profile compared to the others. In large-cap funds, they invest in stocks that are in the top 100 companies. For example, Nifty 50 stocks. |
| Mid-cap funds | Mid-caps are slightly riskier than large-cap stocks and less risky than small-cap stocks. |
| Small-cap funds | Small-cap stocks are riskier than the other two. Despite the risk, these stocks have great growth potential. |
| LIQUIDITY AND VOLATILITY | |
| Large-cap funds | Large-cap funds are usually less volatile unless there is some news. They are stable and provide good liquidity and good returns. |
| Mid-cap funds | Mid-cap funds have moderate volatility and moderate liquidity. |
| Small-cap funds | Small-caps stocks are more volatile and have less liquidity. |
| RETURNS | |
| Large-cap funds | Large-cap offers a steady and consistent return, and they have less volatility. They have provided an average return of 7% in the past 5 years. |
| Mid-cap funds | The average returns of mid-caps from the past 5 years were around 10.28%. They offer better returns compared to large-cap funds. |
| Small-cap funds | Despite being the highest risk scheme, they offer very good returns. The average of the last 5 years has been 14.74%. |
| Who Should Invest in Small Cap Vs Mid Cap Vs Large Cap? | |
| Large-cap funds | For conservative investors who are looking for long-term returns, a large-cap is the best option. If you are not expecting an aggressive return, you can go with large-cap funds. |
| Mid-cap funds | The risk involved in mid-cap funds is slightly higher than in large-cap funds. This is suitable for investors who are moderate risk-tolerant with a long-term investment horizon. |
| Small-cap funds | These are best for short-term investors. Aggressive investors with high-risk tolerance can go for these funds. Good research is required before investing in a small-cap fund. |
| GROWTH | |
| Large-cap funds | These companies have a good reputation and higher chances of generating stable returns. |
| Mid-cap funds | Moderate potential for growth. |
| Small-cap funds | Considered to have more growth potential than large and mid-cap fund |
Key Takeaways to Get from the Difference Between Large Cap, Mid Cap, And Small Cap Funds
- Large-cap funds are less risky than small and mid-cap funds.
- Small and mid-cap funds have higher growth potential than large-cap funds.
- Large-cap funds are good for conservative investors.
- Mid and small-cap funds are suitable for medium-risk takers to aggressive investors.
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