Understanding small-cap, mid-cap & large-cap mutual funds

Equity Mutual funds are one of the easiest ways to invest your money to get good returns. There are many types of mutual funds available on the basis of risk appetite and market capitalization. If you are new to the world of mutual funds, you might not know the terms like Mid-cap funds, Large-cap funds, blue-chip funds, etc. Let us begin to learn the basics of Mutual funds:

What do you mean by Market capitalization?

The market value of all the shares of a company owned by its shareholders is known as Market Capitalization, and the stock market determines it. It is of three types:

  1. Large Cap
  2. Mid Cap
  3. Small-Cap

SEBI introduced some rules in 2017 to categorize the companies on the basis of their market cap. The categorization is as follows:

  • Large Cap companies – The top 100 companies listed in the stock market on the basis of their market capitalizations are called Large Cap companies. The funds that include the large-cap companies are called ‘Large-cap mutual funds.’ These companies have high market value and a good track record. They are also called Blue-chip stocks.

Large Cap funds are less risky as they are among the top 100 companies. Besides, they are also less volatile, offering good liquidity and returns to the investors. Large-cap companies offer a consistent and regular return as they have less volatility.

  • Mid Cap companies – Companies ranking between 101 to 250 on the basis of market capitalization come under Mid Cap companies. Mutual funds that have mid-cap companies are called Mid-cap funds. It’s not necessary that Mid-cap companies are included in broad market indexes as they have a limited market presence.

Mid-caps are riskier than large-cap stocks but are less risky than small-cap stocks. They have moderate liquidity and volatility. If you want to have higher returns and are willing to take the risk, your portfolio should have mid-cap mutual funds.

  1. Small-cap companies – These are the companies that rank from 251 positions onwards in terms of market capitalization. The mutual funds holding stocks of these companies are called Small-cap funds. These companies do not have a long track record. For example, small-cap companies may include startups or a company under development. Small-cap stocks are more volatile and less liquid. However, they have huge growth potential. Small-cap companies are the best for aggressive investors who have a high-risk appetite. However, one should do good research before investing in a small-cap fund. If you can take a risk and have spare funds you can afford to lose; then a small-cap might be a good option.

If you want to have the best of all the worlds, then multi-cap funds are the best equity mutual funds. These equity funds diversify the investment in stocks across the market cap spectrum. Multi cap funds are ideal for investors who want to take less risk but want more returns on their investment.