Difference Between Large Cap and Mid Cap and Small Cap Mutual Fund

In India, companies are classified by market capitalisation into large-cap, mid-cap, and small-cap. SEBI defines large-cap as the top 100 companies by market value, mid-cap as those ranked 101st to 250th, and small-cap as companies ranked 251st and beyond.
Difference Between Large Cap, Mid Cap and Small Cap Funds
4 mins read
08-October-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.

Market capitalisation and mutual funds

Mutual fund investment strategies often categorize securities based on market capitalisation. For instance, a fund designed to invest primarily in large-cap companies would be labeled as such. This nomenclature is commonly used by Indian fund houses, leading to the availability of large-cap, mid-cap, and small-cap fund options.

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.

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.

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.

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

 

Large cap vs mid cap vs small cap funds - A detailed analysis

1. Risk assessment and return expectations

Large-cap funds, invested in established companies with substantial market capitalization, generally exhibit lower risk profiles compared to mid-cap and small-cap funds. Their consistent performance and established market presence contribute to a more stable investment environment.

Mid-cap funds, investing in companies of intermediate size, offer a balance between risk and return. While they carry a higher risk than large-cap funds, they also present greater growth potential.

Small-cap funds, focused on smaller companies, typically involve the highest risk levels. Their smaller size and potential for greater volatility can lead to more significant fluctuations in investment values.

2. Investment goals and fund selection

Investors should carefully consider their risk tolerance and investment horizon when selecting funds.

Large-cap funds are well-suited for risk-averse investors seeking steady returns. Their lower volatility and established nature make them a conservative choice.

Mid-cap funds offer a balance between risk and reward, making them suitable for investors with moderate risk tolerance. Their potential for higher returns can be attractive for those willing to accept some market fluctuations.

Small-cap funds are primarily targeted at investors with a high tolerance for risk. Their potential for significant returns comes with the understanding of the associated volatility.

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.

Which one is the best for investment?

While large-, mid-, and small-cap stocks each offer distinct advantages and disadvantages, the optimal choice for an investor depends on their risk tolerance, investment objectives, and time horizon. A well-balanced portfolio may benefit from a diversified allocation across these market capitalisation categories. Large-cap stocks can provide stability and moderate growth, often accompanied by dividends. Conversely, small-cap stocks may offer greater growth potential, contributing to the overall performance of the portfolio.

Factors to consider when choosing between small-cap, mid-cap, and large-cap stocks

The selection of an appropriate fund class hinges on various factors, including investment horizon, risk tolerance, and financial objectives. Younger investors may lean towards small or mid-cap funds for potential long-term capital appreciation, while those approaching retirement might favor the relative stability of large-cap investments. It is imperative to assess how these investment choices align with individual investment strategies and personal circumstances.

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.

Essential tools for all mutual fund investors

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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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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.