Mutual funds can be categorised based on various parameters. A standard classification categorises equity funds based on market capitalisation. Market cap is the value of total outstanding shares trading in the stock market.
Mutual funds are categorised as follows based on the market capitalisation of portfolio companies: large-cap funds, mid-cap funds, small-cap funds, multi-cap funds, and flexi-cap funds.
Large-cap companies are the first 100 companies in an index, such as Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), based on market capitalisation. The BSE100 includes the largest companies listed on the BSE, and the NSE100 represents the 100 largest companies on the NSE.
As per SEBI’s guidelines, large-cap funds should invest at least 80% of the fund’s total assets in equity and equity-related instruments of large-cap companies. Examples of equity-related instruments include convertible preference shares and convertible debentures.
Based on SEBI’s classification, mid-cap companies rank 101st-250th in terms of market capitalisation in an index. NIFTY Midcap 100 covers the country’s top 100 midcaps listed on the NSE. The BSE mid-cap index includes the top 100 mid-caps listed on the BSE.
Mid-cap companies offer higher growth potential than large-cap companies but are also riskier in comparison. As per SEBI’s mandate, a mid-cap mutual fund must invest at least 65% of its total assets in equity and equity-related instruments of mid-cap companies.
Small-cap companies start from 250th in the index in terms of market capitalization. The NIFTY Small Cap 100 and BSE 250 SmallCap include the first 100 and first 250 small-cap companies listed on the NSE and the BSE.
SEBI requires small-cap equity funds to invest at least 65% of their funds in equity and equity-related instruments of small-cap companies.
Multi-cap equity funds invest in stocks of all market capitalisation sizes, including large-cap, mid-cap, and small-cap companies. SEBI requires multi-cap equity funds to invest at least 75% of their funds in equity and equity-related instruments of companies of all sizes.
Recently, SEBI has mandated multi-cap equity funds to invest at least 25% each in stocks of each category, i.e., large-cap, mid-cap, and small-cap. Before this mandate, multi-cap funds had a large-cap bias, with most of their funds invested in large-cap stocks.
Flexi-cap schemes are like multi-cap schemes as they can invest in companies of any market capitalisation size. However, unlike multi-cap equity funds, the fund managers of flexi-cap funds can reduce their exposure to mid and small-cap stocks to zero. This flexibility allows them to allocate a larger proportion of their portfolio to large-cap stocks if needed.
Essentially, there are no restrictions on what percentage of the funds the fund manager can allot to each category, i.e., large-cap, mid-cap, and small-cap.
Why are there so many types of equity funds?
When it comes to investing, a company’s size plays a role in predicting its potential returns and downside risks. Mutual funds create different equity fund types based on the company sizes in a fund’s portfolio. For example, large companies are considered stable and low risk but offer a lower return potential than medium or small companies. Such categorisation helps investors choose appropriate mutual funds based on their risk appetite and expected returns.
It is essential to know the risks associated with each type of mutual fund and the potential rewards as an investor. Once you are aware of the differences, you can create a diversified portfolio that can help you strike a balance between risk and rewards.
This blog has written by Sundaram AMC. Views expressed are not of Groww.