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Small Cap, Midcap, Large Cap Funds Ranked: What Should You Invest In

Want to know the difference between large cap, mid cap & small cap funds? Here is a detailed comparison of small, mid & large cap funds.
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What is market capitalisation?

You will often hear financial experts advising you to build an investment portfolio with an allocation to small cap, mid cap, large cap mutual fund schemes. In this article, we will understand the different types of mutual funds based on market capitalisation. Let us start with understanding what market capitalisation is.

A company's market capitalisation is arrived at by multiplying the number of shares by the market price per share. Based on their market capitalisation, companies are classified into midcap, small cap, large cap companies. When an index is constructed from a particular category of companies (for example, large caps) by assigning them weightages, it is known as a market capitalisation index. Accordingly, we have the small cap, mid cap, large cap indices.

What is large cap fund?

As per SEBI definition, the 1st – 100th companies in terms of full market capitalisation are large cap companies. A large cap fund is an open ended equity fund that invests a minimum of 80% of its total assets in equity and equity related instruments of large cap companies.

Some examples of large cap funds include:

  1. Axis Bluechip Fund
  2. Mirae Asset Large Cap Fund
  3. Nippon India Large Cap Fund

What is a mid cap fund?

As per SEBI definition, the 101st – 250th companies in terms of full market capitalisation are mid cap companies. A mid cap fund is an open ended equity fund that invests a minimum of 65% of its total assets in equity and equity related instruments of mid cap companies.

Some examples of mid cap funds include:

  1. PGIM India Midcap Opportunities Fund
  2. Quant Mid Cap Fund
  3. Edelweiss Mid Cap Fund

What is a small cap fund?

As per SEBI definition, the 251st onwards companies in terms of full market capitalisation are small cap companies. A small cap fund is an open ended equity fund that invests a minimum of 65% of its total assets in equity and equity related instruments of small cap companies.

Some examples of small cap funds include:

  1. Kotak Small Cap Fund
  2. HDFC Small Cap Fund
  3. ICICI Prudential Smallcap Fund

Difference between large cap, mid cap, and small cap funds

There is a difference between large, mid, and small cap funds based on the companies that they invest in. These companies differ in their growth potential, volatility, liquidity, etc. Let us discuss these differences:

  1. Growth potential: Due to their small size, small cap companies have the highest growth potential. But, this growth potential can have its challenges as the market is hyper-competitive. Mid cap companies have proved themselves to some extent with their past growth. But, they still have the potential to grow faster than large cap companies and become large caps in the future. Large companies are already among the top 3-5 companies in their respective industries; hence the scope for future growth may be limited.
  2. Volatility: Volatility refers to the fluctuations in share prices during uncertain times. Large cap companies are relatively less volatile during uncertain times. Even if they fall with the entire market, they will be the first to recover when the market recovers. Mid cap companies are more volatile than large cap companies, but less volatile than small cap companies. Small cap companies experience the highest volatility during an uncertain time.
  3. Liquidity: Liquidity refers to how easy it is to sell shares close to market prices. Large cap companies have the highest liquidity as there are buyers for them at most price points. With mid cap companies, you may find buyers but not at the price you would like to sell. With small cap companies, it may be challenging to find buyers. It may be challenging to sell shares close to market prices even if you find buyers.

To summarise, small cap companies have the highest potential for growth, followed by mid caps and small caps. Large caps have the lowest volatility, followed by mid caps and small caps. Large caps have the highest liquidity, followed by mid caps and small caps.

Relation between mutual funds and market capitalisation

Mutual fund houses offer investors opportunities to invest in various equity schemes based on market capitalisation. Within the market capitalisation category, mutual fund schemes can include large cap funds, mid cap funds, large & mid cap funds, small cap funds, multi cap funds, etc. 

The market capitalisation funds can also  investing style, i.e., active and passive. So, mutual fund houses offer large cap active funds as well as large cap index funds. Similarly, they offer active and passive mid and small cap funds.

Difference between large cap, mid cap, and small cap in terms of risks

From an investor's perspective, to start with, investing in any equity mutual fund is risky. However, the risk involved in investing in different market capitalisation funds varies. So, small cap funds carry the highest risk but have  to deliver higher returns over the long term. Mid cap funds sit in between small and large cap funds. They carry lower risk compared to small cap funds but higher risk than large cap funds. Among the three categories, large cap funds have the lowest risk. But, it is worth reiterating, all equity funds, irrespective of market capitalisation, are risky.

Role of market capitalisation in your portfolio

In the above section, we discussed the risk of investing in equity funds based on market capitalisation. An investor can decide to invest in various equity funds based on their risk profile. For example, a conservative investor can invest a higher portion of their equity portfolio allocation in large cap funds and a smaller portion in mid and small cap funds.

On the other hand, an aggressive investor can choose to invest a higher portion of their equity portfolio allocation in mid and small cap funds and a smaller portion  cap funds.

With an increase in age and change in circumstances, an investor's risk profile may change. Accordingly, an investor should change their equity portfolio of market capitalisation funds.

Conclusion

Fund houses offer investors various mutual fund schemes based on market capitalisation. As an investor, you should allocate money to market capitalisation schemes based on asset allocation, which in turn depends on factors like your age, risk appetite, investment time horizon, etc.

To start investing in market capitalisation mutual fund schemes as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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