In this article, we will help investors understand what market capitalization is, the bifurcation of stocks based on market capitalization and key differences between them.

What is market capitalization?

Market Capitalization of a company is defined as the market value of all outstanding shares of that particular company.

This value is obtained by multiplying the outstanding shares of the company with the market price of each share.

For example, a company, ‘A’ ltd. has 1,00,000 outstanding shares in the public.

The current market price of a stock is INR 120. Therefore, in order to find the market capitalization, we multiply these two variables, which results the market capitalization to be INR 1.2 million.

Market Capitalization= Current Stock Price x Number of outstanding shares

Given this scenario, one can understand that the market capitalization of a company can alter every second (because the share price keeps changing).

However, this can increase significantly when the company issues more shares in the public and decrease when there is a buy-back of shares.

We will now see how large, small and mid-cap shares are different and discuss the various parameters.

In terms of risk

Large Cap funds

As the name suggests, these are companies that have a large amount of market capitalization.

Securities and Exchange Board of India (SEBI) has provided the definition of large-caps as the largest 100 companies in terms of market capitalization.

Generally, this would mean NIFTY 50 and NIFTY Next 50 companies listed on the exchange.

Best examples of large-cap stocks in India are Reliance Industries, Tata Consultancy Services, Maruti Suzuki, Infosys, etc.

Mid Cap funds

As per the identity provided by SEBI, mid-caps comprise of companies ranging from 101 to 250 in terms of market capitalization.

Mid-caps are considered riskier than large caps, but can provide higher returns and are therefore becoming one of the most sought after investments for retail investors.

Stocks such as Biocon, Tata Global Beverages, AIA Engineering, Federal Bank are well known in the mid-cap space.

Small-Cap funds

According to SEBI, all companies from the 251st company in terms of market capitalization can be considered as small-cap stocks.

Small-cap stocks are considered to be the riskiest for investments given the low capital base.

However, small caps are considered to be the most lucrative option, in terms of investment given their tremendous potential in generating returns.

Examples of small-cap stocks are HEG, Persistent Systems, India Cements, VIP Industries, etc.

Investors should also keep in mind that all mid-cap and large-cap stocks were also once small caps and became large by way of expansion and growth.

There are primarily two risks associated with small-cap stocks that make them potentially riskier than large-cap stocks.

1. Small caps stocks are less liquid when it comes to trading; meaning investors might have difficulty in buying shares in bulk or sell shares at favorable prices as per their wish;

2. The risk for small-cap and mid-cap companies is accentuated because they are likely to have less access to capital as compared to large caps (which can be used for funding new businesses or projects).

This, as a result, impacts on mutual funds that have exposure to small-cap companies;

Parameters Large Cap shares Mid-Cap shares Small Cap shares
Risk Low High Very high
Returns Low High Very high
Liquidity Very High High Low

In terms of returns

In the table below, we get a glance and analyze returns generated by top large, mid and small cap mutual funds

Large Cap Mutual Funds

Name of the Fund 1-Year 3-Year 5-Year Risk Level
SBI Bluechip Fund 2.7% 12.1% 19.3% Moderately High
Quantum Long Term Equity Fund 6.0% 14.2% 17.1% Moderately High
Reliance Large Cap Fund 9.4% 14.2% 21.1% Moderately High
Motilal Oswal MOSt Focussed 25 Fund 2.0% 11.8% 18.9% Moderately High
Aditya Birla Sun Life Frontline Equity Fund 2.5% 12.2% 18.1% Moderately High

Mid-Cap Mutual Funds

Name of the Fund 1-Year 3-Year 5-Year Risk Level
IDFC Sterling Value Fund -1.6% 15.7% 23.2% Moderately High
Mirae Asset Emerging Bluechip Fund 2.7% 19.0% 33.0% Moderately High
L&T Midcap Fund -2.5% 16.7% 30.1% Moderately High
Kotak Emerging Equity Fund -0.8% 14.5% 30.0% Moderately High
Canara Robeco Emerging Equity Fund 2.7% 16.9% 33.5% Moderately High

Small Cap Mutual Funds

Name of the Fund 1-Year 3-Year 5-Year Risk Level
L&T Emerging Businesses Fund 1.7% 21.8% NA High
HDFC Small Cap Fund 16.8% 22.6% NA Moderately High
Reliance Small Cap Fund 6.5% 20.9% 37.5% Moderately High
Sundaram Small Cap Fund -14.9% 7.2% 25.9% Moderately High
IDBI Small Cap Fund -1.2% NA NA Moderately High

Let us for the sake of comparison, take into account 3-year and 5-year returns (as the markets have been very choppy last year due to various domestic factors such as GST implementation, rise in inflation, etc. and at the same time global factors, such as increase in the price of oil, fed hiking its interest rate, trade war between US and China.

The data shown in the above tables, correctly depicts that higher the risk is undertaken by an individual investor, greater would be his/her profits. The average five-year returns for the funds stated above is as follows

Large Caps – 18.9%                                Mid-Caps – 29.96%                                     Small Caps – 31.7%

In terms of the expense ratio and top holdings

Expense ratio is the amount the fund charges to manage one’s investment portfolio.

If someone invests 10,000 in a fund which has an expense ratio of 2%, then it means that he/she needs to pay INR 200 as part of the expense for running the fund.

Simply put, if a fund earns returns of 20% in a particular year and has an expense ratio of 2%, then one would earn a return equal to 18%.

The Net Asset Value (NAV) of a fund is reported after deducting all fees and expenses and hence looking at the expense ratio for a fund becomes critical.

To differentiate between the expense ratio for each fund based on category (i.e. large-cap, mid-cap, and small-cap), we can use the different funds offered by a particular fund house in each category.

The table highlighted below helps us gauge details in a better way

                                                              Reliance Mutual Fund
Type of Fund Expense Ratio
Reliance Large Cap Fund (Large Cap) 1.28%
Reliance Growth Fund (Mid-Cap) 1.51%
Reliance Small Cap Fund (Small Cap) 1.22%


                                                                  L&T Mutual Fund
Type of Fund Expense Ratio
L&T India Large Cap Fund (Large Cap) 2.01%
L&T Midcap Fund (Mid-Cap) 1.49%
L&T Emerging Businesses Fund (Small Cap) 1.57%


                                                                  Kotak Mutual Fund
Type of Fund Expense Ratio
Kotak Bluechip Fund (Large Cap) 1.15%
Kotak Emerging Equity Fund (Mid-Cap) 1.26%
Kotak Small Cap Fund (Small Cap) 1.40%

Also Read: 10 Top Performing Mutual Funds in India (2018)

Therefore, one can see that expense ratio differentiates according to different fund houses.

As expense ratio contains management fees, distributor’s income, registrar’s fees, trustee fees, marketing expenses, etc., these expenses vary across different funds and fund houses.

However, Securities and Exchange Board of India (SEBI) came out with a circular recently wherein it highlighted the Total Expense Ratio (TER) to be followed basis the fund size as highlighted below

AUM (Rs. Crores) TER for equity-oriented schemes (%) TER for other schemes (Excluding Index funds, Exchange traded funds and Fund of Funds)
0 to 500 2.25% 2.00%
500 to 750 2.00% 1.75%
750 to 2000 1.75% 1.50%
2000 to 5000 1.60% 1.35%
5000 to 10000 1.50% 1.25%
10000 to 50000 TER reduction of 0.05% for every increase of 5000 crore AUM or part thereof TER reduction of 0.05% for every increase of 5000 crore AUM or part thereof
>50000 1.05% 0.80%

In terms of top holdings,  the top mutual funds as highlighted above have the following in common:-

Large Cap Funds

Name of the Fund Top Holdings
SBI Bluechip Fund HDFC Bank Ltd, L&T, M&M, ITC Ltd., Nestle India
Quantum Long Term Equity Fund Infosys Ltd, HDFC Ltd, Bajaj Auto, Hero MotoCorp Ltd, TCS
Reliance Large Cap Fund SBI, ITC Ltd, HDFC Bank Ltd, L&T Ltd, Infosys Ltd
Motilal Oswal MOSt Focussed 25 Fund HDFC Bank Ltd, Maruti Suzuki India Ltd, Kotak Mahindra Bank Ltd, HDFC Ltd, HDFC Standard Life
Aditya Birla Sun Life Frontline Equity Fund HDFC Bank Ltd, Infosys Ltd, ICICI Bank Ltd, ITC Ltd, L&T Ltd

Based on the above charts we can analyze and see that HDFC Bank Ltd, HDFC Ltd, Infosys, TCS, and ITC Ltd are hot stocks in the large-cap space that most mutual fund houses invest in.

Mid-Cap Funds

Name of the Fund Top Holdings
IDFC Sterling Value Fund Future Retail, RBL Bank Ltd, Bajaj Finance Ltd, Minda Industries Ltd, Ramco Cements
Mirae Asset Emerging Bluechip Fund HDFC Bank Ltd, Kotak Mahindra Bank, ICICI Bank Ltd, Reliance Industries Ltd, Havells India Ltd
L&T Midcap Fund Bharat Financial Inclusion, Emami Ltd, Berger Paints, Ramco Cements Ltd, City Union Bank Ltd
Kotak Emerging Equity Fund Bharat Financial Inclusion, Schaeffler India Ltd, RBL Bank Ltd, Atul Ltd, Ramco Cements Ltd
Canara Robeco Emerging Equity Fund Bajaj Finserv, Reliance Industries, ITC Ltd, Britannia Industries Ltd, Atul Ltd

If we were to look at the favorite stocks in the mid-cap space, the top picks in this space by various fund houses have been RBL Bank Ltd, Ramco Cements, Atul Ltd, Bharat Financial Inclusion Ltd.

Small-Cap Funds

Name of the Fund Top Holdings
L&T Emerging Businesses Fund HEG Ltd, Lakshmi Machine Works, Ramco Cements, Future Retail Ltd, CARE Ratings
HDFC Small Cap Fund NIIT Technologies, Aurobindo Pharma, First Source Solutions Ltd, Sharda Cropchem Ltd, SKF India Ltd.
Reliance Small Cap Fund Zydus Wellness, VIP Industries, Cyient Ltd, Deepak Nitrite Ltd, Navin Flourine International Ltd
Sundaram Small Cap Fund Rane Holdings Ltd, Navin Flourine International, V-Guard Industries, J K Cement Ltd
IDBI Small Cap Fund General Insurance Corporation of India Ltd, 3M India Ltd, NRB Bearings Ltd, Camlin Fine Sciences Ltd, KEI Industries Ltd

Based on our analysis, we find that the top picks in this space are HEG Ltd, Navin Flourine International Ltd, V-Guard Industries etc.

In terms of investment approach?

As large caps funds invest primarily in companies having a greater market capitalization, they are less prone to risk as compared to mid and small caps.

The investment approach can be found out by looking at examples of specific funds.

Such as Reliance Large Cap Fund which invests primarily in companies whose market capitalization is within the range of the highest & lowest market capitalization of BSE 200 Index (The fund chooses the stocks based on strong fundamentals and in tune with the main objective to generate long term capital appreciation).

Other examples could be that of Motilal Oswal Mutual Fund (which follows the methodology of QGLP; i.e Quality, Growth, Longevity and Price across all its funds and differentiates only in picking companies as per the type of fund, i.e choosing companies having smaller market capitalization  for small-cap funds and is able to generate long term capital appreciation.


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