Difference between Large Cap, Mid Cap and Small Cap Funds

Comparison Large-cap, Mid-cap, and Small-cap funds

What is Market Capitalization?

Market capitalization refers to the total current market value of a company based on its total outstanding shares. It is calculated by multiplying the current market price of a stock with the total number of outstanding shares in the market.

The market capitalizations have been classified into 3 broad capitalizations which capture the whole market. These are:

Large Cap - The top 100 companies in terms of market capitalization. These stocks usually have a market cap of over Rs.20,000 crores.

Mid Cap - The 101st to 250th ranking companies in terms of market capitalization. These stocks usually have a market cap of more than Rs.5,000 crores but less than Rs.20,000 crores. 

Small-Cap - Stocks that fall in the 251st rank and below in terms of market capitalization. These stocks usually have a market cap of less than Rs.5,000 crores.

Equity Mutual Funds

Equity Mutual Funds are those mutual funds which invest in equity & equity related instruments of the companies. On the basis of market capitalization, the equity funds are classified into 3 main categories i.e large-cap, mid-cap, and small-cap funds. SEBI has mandated some rules & regulations governing the underlying investments in these funds to ensure the protection of investor's interests. Let's have a look:

Large Cap Fund - Large Cap Funds are those equity mutual funds which predominantly invest in Top 100 companies in terms of market capitalization. These funds are known as Bluechip funds as major investments are made in bluechip stocks. These companies are one of the largest companies in India with large market shares, strong financials, sector leadership, high valuations & strong corporate governance practices.

As per SEBI requirements, these funds need to invest at least 80% of their assets in equity securities of the large-cap companies.

Also Read: Best Large Cap Mutual Funds to Invest

Mid Cap Funds - Mid Cap Funds are those equity mutual funds which predominantly invest in companies with rankings between 101 to 250th companies in terms of market capitalization. The midsize companies have very high growth potential backed with a good & growing financial track record over the years. These companies are expected to eventually transform into large-cap firms. This makes the mid-cap market a good opportunity for long term investments.

As per SEBI requirements, these funds need to invest at least 65% of their assets in equity securities of the midcap companies.

Read: Best Mid Cap Funds to Invest

Small-Cap Funds are those equity mutual funds which predominantly invest in companies rated below 250th company in terms of market capitalization. These funds invest in equity & equity-related securities of small companies or start-ups which have the potential to become midcaps & later large caps with their high growth potential, innovative business idea & marketing strategies. As per SEBI requirements, these funds need to invest at least 65% of their assets in equity securities of the smallcap companies. Rest can be invested as per the fund manager's discretion in equity securities of any market capitalization.

Read: Best Small Cap Funds to Invest

Which Fund is Better - Large Cap, Mid Cap & Small Cap Funds

  • Market Capitalization: Large Cap companies have a market capitalization of over Rs.20,000 crores. Midcap companies have a market capitalization of more than Rs.5,000 but less than Rs.20,000 crores. And Smallcaps have a market cap of less than Rs.5,000 crores.
  • Growth Potential: The growth potential is lower in Large caps as compared to midcap & small caps. This is because the large companies already have big market capitalizations which leaves low chances for growth. The Smallcaps & Midcaps have higher growth potential and therefore could offer higher returns on investment. This is because their small size leaves room for these companies to become large companies over the years.
  • Risks: Large Cap Funds invest in Top 100 companies with strong financials, large market shares & good corporate governance practices, which makes them less risky as compared to other equity funds. Risks are relatively higher in Midcap funds due to investments in growing companies which leads to higher volatility in returns. However, the risks in midcap funds are lower as compared to small-caps.

Smallcap funds are the most risky among the 3 broad market capitalizations because of their investments in small companies which usually have issues like small market share, unorganized management, lack of capital, & corporate governance issues.

So, the small caps are exposed to higher risks or volatility in returns than large & midcap funds.

  • Liquidity: The Large-cap Funds have a high liquidity because the large-cap stocks are usually the most actively traded stocks on the exchange. As most of the large-cap stocks have large market shares & are leaders in their respective sectors, they are well known to investors in the market which increases their liquidity in the market. The liquidity is comparatively low in midcaps because of the size of midcap companies.

The small-cap funds have the lowest liquidity because trading volumes are generally very low in small-cap stocks. Many stocks in the smallcap universe have almost zero liquidity which makes it difficult for the fund managers to sell the scheme holdings. The fund manager has a very important role to play in picking quality smallcap stocks which have the necessary liquidity in case the scheme has to sell the holdings.

  • Returns: Large Cap funds offer more stable returns than midcap & smallcap funds. However, the expected returns are usually lower than other categories. For a long investment horizon, investors can expect 10-12% average returns on an annualized basis.

Midcap funds are expected to generate better returns than Large-cap funds but with relatively higher volatility. And the expected returns from Midcap funds are lower than that of Smallcap funds. Investors can expect 12-14% CAGR returns from Midcap funds for a long investment tenure.

Small-Cap Funds have the potential to offer the highest expected returns among the market capitalizations. Investors can expect returns of around 15% for a long investment horizon.

  • Investment Suitability: Investments in large-cap funds are recommended for investors having a moderately high-risk appetite along with an investment horizon of 5 Years or more. Investments in Mid-cap funds are more suitable for investors with a high appetite having an investment horizon of 7 Years or more. Small-cap funds investments are recommended for high-risk investors having an investment horizon of at least 7-10 Years.
ParametersLarge Cap FundsMid Cap FundsSmall-Cap Funds
Growth PotentialModerately HighHighVery High
RisksModerately HighHighHigh to Very High
LiquidityHighModerateLow
Expected Returns 10-12%12-14%15%
Ideal Investment horizon5 Years & above.7 Years & above.7-10 Years & above.

Last Updated: 26-Nov-2020

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