Large-cap funds are open-ended equity funds
which invest at least 80% of their total assets in large-cap stocks. Since most large-cap companies have an excellent track record, they are considered to be worthy and generate considerable wealth for their investors. Most large-cap companies have a market cap of Rs.20000 crore or more. They dominate the industry and also hold well in times of recession. Moreover, as these stocks are less volatile in comparison to mid and small-cap stocks, they become less risky. Equity funds that invest in such large-cap companies are therefore known as large-cap funds. Some examples are Infosys and Reliance Industries that have a strong foothold in the market and show relatively consistent market performance.
Mid-cap funds are open-ended equity funds which invest around 65% of their total assets in equity and equity-related instruments of mid-cap companies which usually have a market cap above Rs.5000 crore but less than Rs.20000 crore. Investing in mid-cap companies can get riskier as compared to large-cap ones because they tend to be more volatile. However, mid-cap companies also can turn into large-cap ones in the long run and therefore, offer higher growth potential
. Some examples of mid-cap companies listed on Indian stock exchanges are Metropolis Healthcare, Castrol India and LIC Housing Finance.
Small-cap funds are open-ended equity funds that invest a minimum of 65% of their total assets in small-cap stocks. Since these are newer companies, they offer very high growth potential. However, the risk associated with them is also considerably higher. The market cap for such companies is usually less than Rs.5000 crore. Moreover, despite these companies
having a history of underperformance, they often outperform when an economy is emerging from a recession. Some examples of such companies include Hathway Cable, DB Corp etc. Small-cap funds that invest in such companies get considered to be best for investors with higher risk tolerance.
An important point to note here is that since the share price of companies keeps changing, so does their market cap. Also, the market cap is directly proportional to the number of shares issued to the public. If the numbers increase, the market cap also increases.