Mutual funds are one of the best ways to save and invest money to generate good returns in the future. There are several mutual funds available based on Market Capitalization and Risk appetite.
If you are a beginner who is just diving into the world of the stock market, you may come across different jargon related to the stock market, such as Large-cap funds, Mid-cap funds, Blue chip companies, and many more. Let us begin with the basics and understand what market capitalization is.
The market value of all the shares owned by a company’s shareholders is known as market capitalization. The worth of a company is determined by the stock market.
It is also defined as the market value of all outstanding shares. It is calculated by multiplying the entire number of a company’s outstanding shares by the current market price of one share, which is commonly referred to as ‘market cap’.
There are three types of market capitalizations:
What are large-cap, mid-cap, small-cap companies, and what is the difference between them? SEBI (Securities Exchange Board of India) established certain regulations in 2017 to categorize companies according to their market cap.
Now, we see the differences in these market capitalizations in detail below.
The SEBI has developed criteria for classifying companies. The top 100 companies listed in the stock market based on market capitalization are classified as large-cap companies. The mutual funds that hold the companies from the large-cap are called ‘Large-cap funds’.
Large-cap companies usually have good track records. The market value (market cap) of these companies is significantly high. These are also called ‘blue-chip stocks’. The market cap for these companies is around Rs.20000 crores and more, and they have a strong market presence.
SEBI established a rule in the year 2017, according to which companies that are ranked from 101 to 250 in terms of market capitalization are known as mid-cap companies. The market cap for these companies will be around Rs.5000 to Rs.20000 crores. Mutual funds that hold stocks from the mid-cap are called ‘Mid-cap funds’.
Mid-cap companies also have a good track record, but the difference is noticeable compared to large-cap companies. Mid-cap funds are involved with more risk than large-cap funds. Mid-cap companies may or may not be included in broad market indexes due to their limited market presence.
The companies ranked from the 251st position onwards in terms of market capitalization are known as small-cap companies. The market cap for these companies is below Rs.5000 crores. The mutual funds that hold stocks from the small-cap are called ‘Small-cap funds’.
Small-cap companies don’t have a long track record. For example, a start-up company or a company that is under development can fall under the small-cap sector. These companies are mostly not included in the broad market indices because of their negligible market presence.
Let us understand the difference between Large-cap, Mid-cap, and Small-cap funds with respect to risk profile, liquidity and volatility, and returns and growth
|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.|
|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 THEM?|
|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.|
|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 funds.|
A. The market value of all the shares owned by a company’s shareholders is known as market capitalization. The stock market determines the worth of a company.
A. Large-cap funds are more stable because they invest in less volatile companies.
A. Investors who are willing to take on more risk for higher returns can invest in small-cap funds.