This article is a product of a small case study that deals with the analysis of the returns of the 3 major mutual funds categories small-cap, mid-cap, and large-cap mutual funds. Before we dive into the details of the case study we shall first describe what these different mutual funs are.

So What Is Small, Large and Mid-Cap Mutual funds?

Large-cap (sometimes “big cap”) refers to a company with a market capitalization value of more than $10 billion. Large cap is a shortened version of the term “large market capitalization.” Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its stock price per share. A company’s stock is generally classified as large cap, mid cap or small cap.

Small cap is a term used to classify companies with a relatively small market capitalization. A company’s market capitalization is the market value of its outstanding shares. The definition of small cap can vary among brokerages, but it is generally a company with a market capitalization of between $300 million and $2 billion.

SEBI has decided a total of 11 categories under equity schemes, but a mutual fund company can only have 10 categories and it has to choose between value or contra. Yet, 10 categories look a bit high but  it’s fair considering the possible variations in the strategies. To make this easier, SEBI has also defined the meaning of Large Cap, Mid Cap and Small Cap.

Large Cap Top 100 companies in terms of market capitalization
Mid Cap

101st- 250th companies in term of market capitalization

Small Cap 251st company onwards in terms of market capitalization

Additional Information

Large Cap Top 100 companies in terms of market capitalization Minimum investment in equity & equity related instruments of large-cap companies – 80% of total assets
Mid Cap 101st- 250th companies in term of market capitalization Minimum investment in equity & equity related instruments of mid-cap companies – 65% of total assets
Small Cap 251st company onwards in terms of market capitalization Minimum investment in equity & equity related instruments of small cap companies – 65% of total assets

Coming back to our analysis, we try to imply on the fact that in each mutual fund category the higher returns are generally associated with mutual funds of higher quality and rating.

Here we have selected 2 mutual funds in each category of small, mid, large-cap one with a higher rating than the other. By
analyzing the returns for 4, 5, and 6 years respectively we try and prove that the returns are greater with a  higher rated mutual fund of a better quality.

What Is a Mutual Fund Rating?

A mutual fund rating is usually a measure of a fund’s historical risk-adjusted performance, over different time frames.  It is thus a composite measure of both return and risk, which gives an idea about its ability to deliver returns for a given level of risk.

The ratings are based on different time periods—trailing 3 years, 5 years or 10 years—combined to give a single measure of risk-adjusted performance. After the ratings are calculated, stars are assigned on the basis of the percentile in which the mutual fund is positioned. For instance, the top 10% funds are assigned a 5-star rating, while the bottom 10% funds are slapped with a 1-star rating.

In our case study we have chosen :

Large-cap Mutual Funds

SBI Blue-chip Fund Indiabulls Blue-chip Fund
Rating :5 stars Rating :3 stars
Top holdings include :

HDFC Bank Ltd.
CBLO(CCIL)
Larsen & Toubro Ltd.

Top holdings include :

CBLO(CCIL)
Nifty
Housing Development Finance Corporation Ltd.

Let us consider an SIP amount of 2000 rupees per month. The starting date of which is 2nd January 2014 and the ending date is 2nd December 2017(i.e a period of 4 years ).
The variation of the NAV(net asset value) is shown below.

With a total investment of 96,000 rupees over the course of 4 years, SBI blue-chip mutual fund produces a final amount of 1,28,704 rupees, hence it produces an average 4-year return value of 34.06%.

With a total investment of 96,000 rupees over the course of 4 years,Indiabulls blue-chip mutual fund produces a final amount of 1,26,650 rupees, hence it produces an average 4-year return value of 31.90%

Hence the better quality and higher rated SBI mutual fund provides a better return value over 4 years

1 year 3 years 5 years
SBI mutual fund 9.17% 12.46% 18.81%
Indiabulls mutual fund 8.06% 13.94% 14.15%

 

Mid-Cap and Small-Cap Mutual Funds

Mid-cap:

L&T Mid-Cap Fund Sundaram Mid-Cap Fund
Rating: 5 stars Rating: 3 stars
Top holdings include
Bharat Financial Inclusion
Berger Paints India
Emami
Top holdings include
The Ramco Cements
Sundaram-Clayton
Quess Corp
Trent

Small-cap:

Reliance Small-Cap Fund Sundaram Small- Cap Fund
Rating: 4 stars Rating: 1 stars
Top holdings include

Navin Fluorine International Ltd.
Deepak Nitrite Ltd.
Zydus Wellness Ltd.

Top holdings include

Rane Holdings Ltd.
Navin Fluorine International Ltd
V-Guard Industries Ltd.

Small-cap funds are generally risky, but over a long period of time with a systematic investment via SIP’s, small-cap funds may produce a higher rate of interest when compared to mid-cap or large-cap mutual funds.
Shown below is the variation in NAV(net asset value) of Reliance Small-Cap Fund vs Sundaram Small-Cap Fund.

Small-Cap Funds

The SIP amount is 2000 rupees and the start date is 2nd January 2012 and the end date is 2nd December 2017(i.e a period of 6 years), with an initial investment of 1,44,000 Rupees, we get a net amount of 41,7,590.3 Rupees through Reliance Small Cap Fund and 3,40,011.3 Rupees through Sundaram Small-Cap Fund.
i.e a rate of interest is 189.99% and 136.11%  in a span of 6 years for Reliance and Sundaram Small-Cap Fund respectively.

1 year 3 year 5year
Reliance small-cap fund 14.72% 24.09% 36.06%
Sundaram small-cap fund 0.53% 15.00% 28.83%

Mid-Cap Funds

The SIP amount is 2000 Rupees and the start date is 2nd January 2013 and the end date is 2nd December 2017(i.e a period of 5 years) with an initial investment of 1,20,000 Rupees. The net amount obtained is  2,60,144.3 Rupees through L&T Mid-Cap Fund and 2,36,352 Rupees through Sundaram Mid-Cap Fund.
i.e a rate of interest of 126.7% and 96.96%  in a span of 6 years for L&T and Sundaram Mid-Cap Funds respectively.

1 year 3 year 5year
L&T mid-cap fund 8.84% 19.66% 29.36%
Sundaram mid-cap fund 7.00% 16.62% 26.14%

This analysis goes to prove that the better the quality and the rating of the mutual funds, the better returns it will provide over a period of time be it small-cap, mid-cap or large-cap.

Happy investing 😊

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.