I see many companies being called small-cap, mid-cap, or large-cap. What does it mean for the company?Asked
Equity mutual funds give good results over a long period of time. The higher the investor is willing to take risk, the higher return will he be getting.
The least risky among mutual funds are large cap mutual funds. Here large cap funds usually invest in large cap companies. In India, large cap companies are usually very stable and can handle tough economic conditions far better than smaller companies. Therefore, when one invests in the best large cap mutual funds, his money gets invested in stable companies. Large cap refers to the top 100 companies by market size.
Same way mid cap mutual funds are comparatively more risky than large cap mutual funds. Here investment is made in companies with market capitalisation that can be roughly anywhere between INR 50 billion and INR 200 billion. These companies are comparatively less stable than large cap companies but also give better returns than large cap. Stocks of this company are volatile.
Small cap mutual funds have the riskiest stocks because of the high volatility. These are companies with lower market capitalisation. These are very unstable companies and will take the worst hit in case of a market downturn. Investors willing to take a lot of risk invest in this type of funds.
Below mentioned are mutual funds for large cap, mid cap and small cap in the same order for investor’s reference:
Cap here stands for market capitalization. It is calculated by company’s stock price multiplied by the number of outstanding shares.
Publically traded companies are generally grouped into three categories on the basis of market capitalization: Large, mid and small cap companies. However, there is no cutoff rules defined for placing companies into these categories.
Mutual funds are also categorized on the basis of the market cap:
Large Cap funds: When mutual fund invest large portion of the capital in companies having large market capitalization, these funds are called Large Cap equity funds. These funds provide sustainable returns and stability to investors.
Mid- Cap funds: Here, the mutual fund invest in stocks of mid size companies. These funds provide moderate risk to investors.
Small Cap funds: In these types of funds, fund manager invests major portion of the investors’ money in stocks of companies having low market capitalization.
Multi Cap funds: These funds are used to minimize the risk and diversify the investment. In these funds, capital is invested in companies across different sectors.
Stock market is broadly divided on basis of market capitalization as among large cap, mid cap, and small cap. Market capitalization is calculated by multiplication of the number of outstanding shares company offered with the current market price of one share.
Let’s see the difference between these market cap:
Large cap companies
Mid cap companies
Small cap companies
The size of companies. Large cap refers to the top 100 companies by market size. Mid cap, to 100-250. Small cap, the companies smaller than those. There is no clear definition of these. Many different sources define the terms differently.
So a large cap mutual fund should primarily invest in large cap companies and so on.