Large-Cap, Mid-Cap, and Small-Cap Funds: A Definitive Guide
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Equity mutual funds, with the long-term capital appreciation and risk mitigation they offer via diversification, have become a popular choice amongst Indian investors. Equity funds are further classified into various sub-categories, depending on whether they invest in equity instruments by sector, geography, or market capitalisation.
Market capitalisation-weighted funds (or market-cap mutual funds) focus on companies of varied sizes across sectors and geographies. Read on to find out how they enable smarter asset allocation for one’s investment portfolio.
Market capitalisation (or market cap) refers to the total market value of a company’s outstanding shares. This is derived from multiplying a company’s share price by the total number of shares issued. Based on this number, companies are classified into small, mid, and large-cap companies.
Companies are ranked between 1 to 250 and accordingly categorised as large, mid or small-cap by the Association of Mutual Funds of India (AMFI) twice a year. This ensures changes in companies’ market cap, owing to share price movements, are reflected in their rankings regularly.
Types of market caps
Large-cap funds invest at least 80% of their assets in equity-linked instruments of large-cap companies, as per SEBI (Securities Exchange Board of India) rules. These companies are highly reputed and are known to provide stable income streams via dividend payouts and capital preservation. Absolute returns on these funds may be lower than mid-cap and small-cap funds, however. During market slumps, large-cap funds also experience volatility in their net asset values (NAV). Since money is invested in financially strong companies, however, they overcome this volatility relatively quickly.
Mid-cap funds invest a minimum of 65% of their capital in companies ranked between 101 to 250 by AMFI. These funds are geared towards investors looking for higher returns compared to large-cap funds, bearing in mind the future growth potential of companies in this segment, while also being ready to take on higher levels of risk. Mid-cap funds are suited to investors with a horizon of at least five to seven years, to be able to reap the benefits of the power of compounding.
Large and midcap funds: The middle ground
Large and mid-cap funds provide investors with a middle ground between growth and stability. They allow them to invest in a larger universe of as many as 250 companies in the country. A minimum of 35% of their capital is invested in each large and mid-cap companies.
In the short term, these funds are susceptible to higher volatility levels, arising from mid-cap equities. It is therefore generally recommended that one stay invested in these funds for at least three years or longer.
Small-cap funds invest at least 65% of their capital in companies ranked 250 and beyond in terms of market capitalisation in India. These funds are extremely sensitive to market movements and, therefore, often see elevated levels of volatility. The slightest shifts in the market can have a substantial impact on the prices of their underlying assets.
At the same time, however, companies that are growing and expanding may also offer substantial returns in the long run. They are recommended more for investors with a higher risk appetite and a longer investment horizon. This typically includes those just starting out in their careers, as they may have more time and capital over an extended period to recover from any potential losses.
Each fund responds to market cycles differently. Their relevance in investor portfolios is therefore dynamic. Aligning each one with evolving financial goals at various stages allows one to build an investment portfolio that balances resilience and growth in equal measure.
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