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?

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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

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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.