What is the difference between Large Cap, Mid Cap, and Small Cap Funds?| North Loop Official Blog
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23 Oct 2020

What is the difference between Large Cap, Mid Cap, and Small Cap Funds?

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What is market capitalisation?

Market capitalisation is a measure of the estimated valuation of a company calculated by multiplying the total number of outstanding shares of a company in the market by the current price of each share. Before we understand the differences between large-cap, mid-cap and small-cap, let us delve deeper into its meaning.

Suppose a company has 30000 outstanding shares in the market and each share gets priced at Rs.30. Then the market capitalisation of the company shall be calculated as follows -

Outstanding shares x price per share 30000 x 30 = Rs.900000

Now, coming to the different types of market cap – the companies that get traded on the stock exchanges are categorized into three broad categories, namely large-cap, mid-cap and small-cap. Similarly, equity mutual funds get categorized based on the market capitalization of the companies they invest in. In this article, we will talk about the meaning and differences between these various funds.

What are large-cap, mid-cap and small-cap funds?

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.

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Coming to the differences between large-cap funds, mid-cap funds and small-cap funds -

Differences in terms of risk -

Large-cap funds - Since these funds invest primarily in large and stable companies, they can beat market volatility and therefore are the least risky.

Mid-cap funds - These funds invest in companies that are less likely to cope with market volatility and therefore have higher risk as compared to large-cap funds.

Small-cap funds - The risks associated with these mutual funds are the highest because they invest in small-cap companies that can struggle during times of recession and find it difficult to remain afloat during an economic crisis.

Differences in terms of returns -

Large-cap funds - These schemes tend to offer steady and consistent returns over the long term.

Mid-cap funds - Since these funds have slightly higher growth potential, they offer relatively higher mutual fund returns than large-cap funds.

Small-cap funds - Despite the high risk, these funds have very high growth potential and therefore, can offer higher returns.

Conclusion -

According to experts and the relevant data, if you have a low-risk tolerance, long-term investment horizon and are looking for opportunities in the equity market, then large-cap funds can be a good option for you. On the other hand, if you have a medium risk tolerance and seek exposure to the equity market, mid-cap funds can align with your risk appetite and investment goals. However, if you are an aggressive investor with high-risk tolerance, small-cap funds can prove to be a good bet.

You can invest in different types of mutual funds online via North Loop. We offer a digital investment platform with personalized recommendations, professional support as well as investment tracking facilities to ensure you have a smooth and easy investing experience. Click here to sign up with us.

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.