Large Cap vs Small Cap vs Mid Cap Fund
Not everyone of us keep watch on market every day. Though we know market is volatile, we need to be updated before taking any decision of investment. So, mutual fund is there to help us. Mutual fund makes pool of investor’s money and a fund manager who is market expert invest money into equity, debt or both the markets.
But, when we look at mutual fund, there are many types of mutual funds. Mutual funds are classified into many types based on risk profile, market capitalization, fund size, asset allocation. We select as per our risk capacity and goal. Suppose, an investor selects equity mutual fund, he has lot of options to select. Below diagram shows classification of equity mutual fund.
Equity mutual funds basically are ones which primarily invests in stocks. He basically invests in a basket of stocks and can get benefit of the bunch of stocks and diversify his investment rather than buying a single individual stock and having a concentrated approach. These equity funds invest directly into stocks and give highest rate of return but the risk involved is also higher.
We hear or read these words, large cap – mid cap – small cap. What do they mean? Let’s read in detail. large cap mid cap small cap mutual funds are equity mutual funds which are classified based on market capitalization. So, first let’s understand, what is market capitalization?
Market capitalization is the worth of a company that is traded in stock exchange. So, it is the multiplication of total number of shares and current market price of one share. The formula is,
Market capitalization = Current market price of one share x Total number of shares allotted by the company
For example, ABC limited has 1, 00,000 of total equity shares and ABC limited is listed in the stock exchange. The current market price of each share is Rs 20.60.
Market Capitalization of ABC Limited = 1,00,000 * 20.60
Market Capitalization of ABC Limited = Rs. 20,60,000
Read also: Are you aware of Contra Funds?
What are small cap, mid cap, and large cap stocks?
Large cap stocks
- Large cap companies have market capitalization of Rs 20,000 crore or more.
- Reliance, SBI, ITC, HUL, Britannia are few examples of large cap companies. These companies dominate the industry and are very stable.
- Large cap companies are good reputed companies which hold themselves well in times of recession or any kind of negative event.
- Consistent good performance of large cap companies makes them less risky.
- Investor who is looking for long term investment, can look for such an investment.
Mid cap stocks
- Mid cap companies are companies whose market capitalization is above Rs 5,000 crore but less than Rs 20,000 crore.
- Metropolis Healthcare, Castrol India, and LIC Housing Finance are few examples of mid cap stocks.
- Because of its volatile nature, investing in these companies can be risky as compared to investing in large cap market companies.
- Mid cap companies have the ability to turn into large cap companies in the long run.
- These companies offer a higher growth potential as compared to large cap stocks, and hence more investors are attracted to investing in such companies.
Small cap stocks
- Small cap companies are those that have a market capitalization of less than Rs 5,000 crore.
- Small cap companies are relatively smaller in size and have significant growth potential.
- Low probability that they will be successful over time make them riskier. This makes the stocks of such company volatile in nature.
- Generally, small cap companies underperform but when an economy emerges out of a recession, small cap stocks outperform.
What is the difference between large cap, small cap and mid cap stocks?
| Large Cap Stock | Mid Cap Stock | Small Cap Stock | |
| Type | Rank among top 100 companies | Rank among top 100-250 companies | Smaller companies |
| Market Capitalization | Rs 20,000 crore or more | between Rs 5,000 crore and less than Rs 20,000 crore | below Rs 5,000 crore |
| Volatility/ Price Fluctuation | Less volatile means prices stay stable | Slightly more volatile than large cap stocks | Highly volatile |
| When to invest? | If investor don’t want to take much risk | If investor can take moderate risk | If investor can take high tolerance of risk |
| Liquidity | Because of high demand, investor can buy or sell large cap stocks easily | As demand is slight lower, mid cap funds are moderate | Small cap has the least liquidity |
Read also: A Beginners Guide to Systematic Investment Plan
What are small cap, mid cap, and large cap mutual funds?
Large cap mutual funds: Large Cap Mutual Fund is an open ended equity fund that invests a bigger proportion of their total assets in companies with a large market capitalization.
Basically 80% of the portfolio comprises of bluechip stocks. These funds are composition of companies which are consistent performers in nature.
Mid Cap Mutual Funds: These funds have exposure to midcap companies to the extent of minimum 65% in that category only. These funds offer higher risk and higher return compared to large cap funds as these funds invest in company which are aspiring future bluechip companies. The goal for the fund manager is to allocate funds to mid cap companies that could be successful in future.
Small cap mutual funds: Small cap mutual funds invest 65% of the corpus in stocks which are small size companies. These funds are most volatile in nature but also are the highest return generators over a longer run.
What is the difference between large cap, small cap and mid cap mutual funds?
| Large Cap Fund | Mid Cap Fund | Small Cap Fund | |
| Invest in | Large cap stocks | Mid cap stocks | Small cap stocks |
| Risk | Carries low risk | Carries moderate risk | Carries high risk |
| Possibility of growth | Low growth potential | Slightly higher chances of growth | possibility of growth is higher than for mid caps and large caps |
| Risk capacity | Less risky | Moderate risky | High risky |
| Liquidity | High | Moderate | Less |
| Performance | Gives consistent return over long term | Fund manager selects companies which can be successful in future | Fund manager selects companies which can be successful in future |
Takeaway:
We read about large cap vs small cap vs mid cap funds. To choose a mutual fund plan depends upon risk tolerance. Large cap companies are already established so there is less chance of its growing significantly. But small cap and mid cap companies have lot of chances to grow and improve their financial position. If investor is ready for risk tolerance, then mid cap and small cap funds might show give good returns.
