Difference Between Large Cap, Mid Cap, and Small Cap Funds

Large-cap funds offer lower risk with stable returns, while small and mid-cap funds present higher growth potential coupled with increased risk. Explore more in the blog.
EXPLORE FUNDS
Difference Between Large Cap, Mid Cap, and Small Cap Funds
EXPLORE FUNDS
4 mins read
06-May-2024

Large-cap, mid-cap and small-cap mutual funds are types of mutual funds based on market capatilisation of the companies they invest in.

The choice between large, mid, and small-cap funds hinges on your risk appetite. Large-cap funds prioritise stability with lower risk, ideal for conservative investors. Mid-cap funds offer a balance, providing growth potential with moderate risk. Small-cap funds hold the allure of potentially high returns, but come with the most significant risk. Ultimately, the best allocation depends on your risk tolerance, investment goals, and investment timeframe.

Mutual funds are a popular investment option for many people in India. They offer a diversified portfolio of stocks and bonds that can help investors achieve their financial goals. However, with so many different types of mutual funds available, it can be challenging to know which one is right for you. In this article, we will focus on the differences between large-cap, medium-cap, and small-cap mutual funds.

What is market capitalisation?

Market capitalisation refers to the total value of a company’s outstanding shares of stock. It is calculated by multiplying the number of outstanding shares by the current market price of one share. Companies are classified based on their market capitalisation into three categories: large-cap, mid-cap, and small-cap.

What are large-cap funds?

Large-cap funds are those companies that have a market capitalisation of more than Rs. 20,000 Crore. In other words, Large-cap funds invest in well-established companies with market capitalisations ranking from 1 to 100. These companies, such as Reliance, SBI, and ITC, are typically well-established and have a proven track record of success. They are often leaders in their respective industries and have a strong market presence.

Read more: What are large cap mutual funds.

What are mid-cap funds?

Mid-cap funds are those companies that have a market capitalisation between Rs. 5,000 crores and Rs. 20,000 crores. Mid-cap funds allocate investments to medium-sized companies positioned between the ranks of 101 to 250 in terms of market capitalisation. These companies are typically smaller than large-cap companies but larger than small-cap companies. Companies such as Godrej Industries and Voltas fall into the mid-cap category. Mid-cap firms hold promise for delivering favourable returns over extended periods. However, mid-cap funds generally entail higher risk compared to large-cap funds.

Read more: What are mid cap mutual funds

What are small-cap funds?

Small-cap funds are those companies that have a market capitalisation of less than Rs. 5,000 crores. Small-cap funds allocate investments to companies ranked 251st and beyond in terms of total market capitalisation. Typically smaller in size compared to large and mid-cap counterparts. Due to their size, they have the agility to swiftly implement ideas and capitalise on market opportunities, a trait often more challenging for larger organisations. Hence, small-cap funds tend to provide higher returns when compared to large and mid-cap funds but possess a higher risk.

Read more: What are small cap mutual funds.

Comparison table – Large-cap funds vs mid-cap funds vs small-cap funds

Investment choices come with a risk-versus-reward trade-off. Large-cap funds, focused on established companies, offer lower risk and steadier returns, making them ideal for conservative investors. Conversely, mid-cap and small-cap funds, targeting growing companies, have the potential for higher returns but also carry greater risk. These options suit investors comfortable with moderate to aggressive risk profiles.

This approach highlights the risk-return spectrum and how different cap sizes cater to varying investor preferences:

Category

Ranking in terms of market capitalisation

Risk level

Growth potential

Large-cap

1st to 100th company in terms of market cap

Low

Low

Mid-cap

101st to 250th company in terms of market cap

Medium

Medium

Small-cap

251st company onwards in terms of market cap

High

High


How to choose between small-cap, mid-cap and large-cap funds

When choosing between small-cap, mid-cap, and large-cap funds, it is essential to consider your investment goals and risk tolerance. If you are looking for stable returns with low volatility, large-cap funds may be the right choice for you. If you are willing to take on more risk for potentially higher returns, mid-cap or small-cap funds may be more suitable.
When making an investment decision in mutual funds, it is essential to consider several factors such as your investment goals, risk tolerance, investment horizon, expense ratio, fund manager’s experience and performance history.
In conclusion, mutual funds offer investors an opportunity to invest in a diversified portfolio of stocks and bonds that can help them achieve their financial goals. When choosing between large-cap, mid-cap or small-cap mutual funds in India, it is essential to consider your investment goals and risk tolerance carefully.

Who should invest in small-cap, mid-cap and large-cap funds?

When considering small-cap, mid-cap, and large-cap investments, it is essential to match your risk tolerance and investment horizon. Let us see who should invest in these:

  • Large-cap funds: Ideal for conservative investors seeking long-term stability rather than aggressive returns.
  • Mid-cap funds: Suited for moderately risk-tolerant investors aiming for long-term growth, acknowledging slightly higher risk levels.
  • Small-cap funds: Tailored for short-term investors with high-risk tolerance, requiring thorough research due to their aggressive nature.

Conclusion

In conclusion, selecting the right market capitalisation for your mutual fund investment aligns with your risk tolerance and financial goals. Large-cap funds, targeting established companies, prioritise stability and are suitable for conservative investors. Conversely, mid-cap and small-cap funds, focused on growing companies, offer the potential for higher returns but come with greater risk. These options cater to investors comfortable with moderate to aggressive risk profiles. By understanding the risk-return spectrum of large, mid, and small-cap mutual funds, you can make informed investment decisions to achieve your financial objectives.

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Frequently asked questions

How are large-cap, mid-cap and small-cap funds in India categorised?

In India, large-cap, mid-cap, and small-cap funds are categorised by the Securities and Exchanges Board of India (SEBI) as follows:

  • Large-cap companies – 1st to 100th company in terms of market cap
  • Mid-cap companies – 101st to 250th company in terms of market cap
  • Small-cap companies – 251st company onwards in terms of market cap
How can you utilise the large-cap vs small-cap or large-cap vs mid-cap into your investment portfolio?

You can use the various types of mutual funds to diversify your portfolio based on your investment goals and risk tolerance. Here are a few tips:

  • Invest in a mix of large-cap, mid-cap, and small-cap funds to spread out risk.
  • Allocate a higher percentage of your portfolio to large-cap funds for stability and lower volatility.
  • Allocate a higher percentage of your portfolio to mid-cap and small-cap funds for higher growth potential.
What is the nature of large-cap vs mid-cap funds?

Large-cap funds invest in large companies with high market capitalisation. They are less risky, less volatile, and provide stable returns. They are good for conservative investors.

What is the nature of large-cap vs small-cap funds?

Small-cap funds invest in small companies with low market capitalisation. They have higher growth potential and higher returns than large and mid-cap funds. However, they are more volatile and suitable for aggressive investors who are comfortable with greater risk.

What are the advantages of investing in large-cap stocks?

The advantages of investing in large-cap stocks include:

  • Stability in size and tenure
  • Steady dividend payouts
  • Clarity in valuations
  • Proven track record of steady performance with consistent earnings
  • A lower risk profile
  • Liquidity, meaning that they can be bought and sold quickly and easily
  • Diversification of investment portfolio
Are mid-cap stocks riskier than large-cap stocks?

Mid-cap stocks are riskier than large-cap stocks but less so than small-cap stocks.

Can small-cap stocks outperform large-cap stocks?

Small-cap stocks can outperform large-cap stocks but are more volatile due to their nature and company size.

How can investors assess the risk of investing in mid-cap stocks?

You can assess the risk of investing in mid-cap stocks by analysing the company’s financial statements, management quality, competitive advantage, industry trends.

Is it necessary to diversify investments across large-cap, mid-cap, and small-cap stocks?

Yes, you must do so in order to balance out the risk and reward trade-off between equity holdings.

Which is better large-cap, mid-cap, or small-cap?

The suitability of large-cap, mid-cap, or small-cap depends on your risk tolerance and investment goals. Large-caps offer stability, mid-caps offer growth potential, while small-caps are high risk/high reward.

Should I invest in small, medium, or large-cap fund?

Decide based on your risk appetite and investment horizon. Large-caps for stability, misd-caps for growth potential, and small-caps for aggressive returns. Diversification across all may be prudent for balanced portfolios.

Which cap is best for SIP?

SIPs can work well with any cap, depending on your risk tolerance and investment objectives. Large-caps offer stability, mid-caps provide growth potential, and small-caps cater to aggressive investors seeking high returns.

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