Gone are the days when people just invested in traditional instruments like FDs and bonds. People are now self-conscious about their money and invest in mutual funds to get higher returns and fulfil their investment goals.
Those who are just starting to invest in mutual funds may not be very well aware of the terminologies used in mutual funds. The equity mutual funds which give the highest returns are further categorized as per market capitalization.
In this article, we will understand market capitalization and different types of mutual funds based on market capitalization.
What is Market Capitalisation?
Market Capitalisation is defined as the market value of the outstanding shares of the company. It is calculated by multiplying the total number of outstanding shares of the company by the current share price of the company.
If the current share price of the company is ₹100 and the number of outstanding shares of the company is 500,0000 then the market capitalisation of the company is ₹500,00,000.
Based on this market capitalisation there are three types of mutual funds i.e., large-cap funds, mid-cap as well as small-cap mutual funds. Let’s understand each of them.
What are Large Cap Mutual Funds?
As per SEBI, the top 100 companies listed in the stock markets on the basis of market capitalisation are large-cap companies. The mutual fund schemes that invest in large-cap companies are defined as large-cap mutual funds.
These companies are the companies with good reputations and track records. They are generally the market leaders. The market value of these companies is generally very high i.e. ₹20000 crore and more. Large-cap mutual funds are less risky and can give stable returns if invested for the long term.
What are Mid-Cap Mutual Funds?
As per SEBI, the companies that ranked from 101 to 250 in stock markets on the basis of market capitalisation are mid-cap organisations. The mutual fund schemes that invest in mid-cap companies are defined as mid-cap mutual funds.
These companies have good track records and can grow as large-cap in the long run. The market value of these companies is more than ₹5000 crore and less than ₹20000 crore. Mid-cap mutual funds are usually considered to be riskier than traditional large-cap funds. But at the same time has higher growth potential.
What are Small-Cap Mutual Funds?
As per SEBI, the companies who ranked above the 250th position in stock markets on the basis of market capitalisation are termed small-cap companies. These companies do not have a long track record and are generally start-ups or developing companies. The mutual fund scheme that invests in small-cap companies is defined as small-cap mutual fund.
The market value of these companies is less than ₹5000 crore. Small-cap funds are highly volatile and involve a high level of risk. But these funds also have the potential to give high returns if they grow.
Difference Between Large-Cap, Mid-Cap, and Small-cap Mutual Funds
Risk Factor
Large-cap mutual funds usually invest in reputed companies with a good track record. So, they are less risky as compared to mid-cap and small-cap funds. Mid-cap funds are riskier as compared to large-cap mutual funds but are less risky than small-cap mutual funds.
Small-cap mutual funds traditionally invest in newly established companies. They carry high risk and shall be avoided by risk-averse investors.
Volatility
Large-cap funds are less volatile. They provide stable returns in the long run. Mid-cap funds are moderately volatile. Small-cap funds are highly volatile.
Returns
Large-cap funds are less volatile so are able to generate stable returns. Mid-cap funds can give higher returns than large-cap funds as they have high growth potential. Small-caps funds can give the highest returns as they are highly volatile.
Conclusion
By proper understanding of market capitalisation, you can diversify your portfolio in a better manner. Do consider your investment goals, risk appetite, investment period, etc. before investing in mutual funds. Large-cap funds are good for conservative investors. Whereas mid-cap and small-cap funds are for those who want higher returns and can take risks.