When it comes to diverse investment options, investing in mutual funds is gaining popularity among many investors. Many consider mutual funds an investor-friendly option due to the low cost of investment and the transparency these funds offer. Among the different types of mutual funds are equity funds, ideal for long-term investment plans. These funds are further classified based on their market capitalization.
Market capitalization refers to a company’s size or market value of a company’s outstanding shares. The market cap for a company can be derived by multiplying the market price of each claim with the total number of outstanding shares of the company. The market cap falls into three broad categories – small-cap, mid-cap, and large-cap.
Small-cap is for companies with relatively small market capitalization. Usually, a company having less than Rs and 5,000 crore value is termed a small-cap company.
Mid-cap companies have a market capitalization of less than Rs. 20,000 crore and a lower cap limit of Rs. 5,000 crore.
Large-cap companies have a market cap that is greater than Rs. 20,000 crore.
Further, small-cap, mid-cap, and large-cap funds can be differentiated based on the following attributes:
|These funds belong to companies generally the top 100 companies in a market with a large market .capitalization||These funds belong to companies with mid-market capitalization||Funds of companies that have slight market capitalization fall in this category|
|These funds have relatively lower risk when compared to mid-and small-cap funds||Mid-cap funds are somewhat less risky than small-cap ones and riskier than large-cap funds||These funds have a slightly higher risk as compared to large- and mid-cap funds|
|A large-cap mutual fund invests a minimum of 80% of its assets in equity and related instruments of large-cap companies||A mid-cap fund invests at least 65% of its assets in equity and associated tools of mid-cap companies||A minimum of 65% is invested in equity and related agencies of small-cap companies|
|Reliance, Tata Consultancy Services, Infosys, and Maruti Suzuki are a few examples of companies that a large-cap fund invests in||Companies such as Biocon, Federal Bank, Tata Global Beverages have investments made by mid-cap funds||Examples of small-cap companies are India Cement, VIP Industries, and Persistent System, wherein small-cap funds invest|
Investors with a low-risk appetite and substantial funds can invest in a large-cap fund. Large-cap is suitable for investors with a long-term horizon and looking for relatively stable returns.
For moderate risk-takers, mid-cap funds could be an ideal option. These provide better returns than large-cap mutual funds. Small-cap usually comprises the most underrated funds, many experts believe. These mutual funds offer better returns than large- and mid-cap funds and involve a higher degree of risk.
As per the risk, liquidity, growth potential, and amount of return, you can decide which fund to invest in. However, your decision should also factor in your investment goals, risk appetite, and investment horizon.