Large-Cap, Mid-Cap, and Small-Cap Funds : Day 13
Investing in equity mutual funds often involves selecting from large-cap, mid-cap, and small-cap funds, which are defined based on the market capitalization of the companies they invest in. Each category offers unique risk-return dynamics, making them suitable for different types of investors.
In this blog, we’ll explore these three fund types in the Indian context, discussing their features, benefits, risks, and suitability to help you make an informed investment decision.
What Is Market Capitalization?
Market capitalization, or market cap, refers to the total value of a company’s outstanding shares. It is calculated as:
Market Cap = Share Price × Number of Outstanding Shares
Based on market capitalization, companies are categorized as:
Large-Cap: The top 100 companies by market cap.
Mid-Cap: Companies ranked 101 to 250.
Small-Cap: Companies ranked 251 and beyond.
This classification forms the basis for large-cap, mid-cap, and small-cap funds.
Large-Cap Funds
Large-cap funds primarily invest in the top 100 companies in India. These are well-established businesses with a proven track record, stable earnings, and high liquidity.
Features of Large-Cap Funds:
Stability: They invest in blue-chip companies known for consistent performance.
Lower Risk: Less volatile compared to mid-cap and small-cap funds.
Steady Returns: Focus on long-term capital appreciation and regular dividends.
Advantages of Large-Cap Funds:
Resilience in Market Volatility: These companies are better equipped to handle economic downturns.
Liquidity: High trading volumes make it easy to buy or sell shares.
Transparency: Regular disclosures provide clear insights into the fund’s performance.
Who Should Invest in Large-Cap Funds?
Investors with a low-risk appetite.
Individuals seeking stable, long-term growth.
First-time investors exploring equity funds.
Mid-Cap Funds
Mid-cap funds invest in companies ranked 101 to 250 by market capitalization. These businesses are in the growth phase and have the potential to become large-cap companies over time.
Features of Mid-Cap Funds:
Growth Potential: They target companies with higher growth trajectories.
Moderate Risk: More volatile than large-cap funds but less risky than small-cap funds.
Higher Returns: They aim to provide better returns than large-cap funds.
Advantages of Mid-Cap Funds:
Opportunity for Growth: These companies often grow faster than their large-cap counterparts.
Portfolio Diversification: Adding mid-cap funds can enhance portfolio returns.
Cost-Effective Entry: Shares of mid-cap companies are often priced lower than large-cap stocks.
Who Should Invest in Mid-Cap Funds?
Investors with a moderate risk appetite.
Those with a medium- to long-term investment horizon.
Individuals seeking higher returns than large-cap funds.
Small-Cap Funds
Small-cap funds invest in companies ranked 251 and beyond. These are emerging businesses with high growth potential but also carry higher risks.
Features of Small-Cap Funds:
High Growth Potential: They invest in companies in the early stages of growth.
High Risk: These funds are highly volatile due to market fluctuations and business uncertainties.
Long-Term Focus: Suitable for patient investors with a high-risk appetite.
Advantages of Small-Cap Funds:
Higher Returns: Potential for exponential growth over time.
Undervalued Opportunities: Often invest in companies not yet recognized by the broader market.
Diversification Benefits: They add variety to a portfolio dominated by large- or mid-cap stocks.
Who Should Invest in Small-Cap Funds?
Investors with a high-risk tolerance.
Those with a long-term investment horizon (7+ years).
Experienced investors looking to maximize portfolio returns.
Comparison of Large-Cap, Mid-Cap, and Small-Cap Funds
|
Feature |
Large-Cap Funds |
Mid-Cap Funds |
Small-Cap Funds |
|
Market Cap Range |
Top 100 companies |
101–250 companies |
251 and beyond |
|
Risk Level |
Low |
Moderate |
High |
|
Return Potential |
Stable, moderate |
Higher than large-cap |
Highest among the three |
|
Volatility |
Low |
Moderate |
High |
|
Liquidity |
High |
Moderate |
Low |
|
Investor Suitability |
Conservative investors |
Moderate-risk investors |
Aggressive, long-term investors |
Performance Analysis
Historical Returns
Large-cap funds typically deliver steady returns in the range of 8–12% per annum, depending on market conditions.
Mid-cap funds have shown returns of 12–18% per annum, reflecting their growth potential.
Small-cap funds have delivered returns of 15–20% or more, but with higher volatility.
Market Conditions
Large-cap funds perform well in stable or bearish markets.
Mid-cap and small-cap funds outperform in bullish markets but can be highly volatile during downturns.
Taxation on Large-Cap, Mid-Cap, and Small-Cap Funds
Short-Term Capital Gains (STCG): Gains from units held for less than one year are taxed at 20%.
Long-Term Capital Gains (LTCG): Gains from units held for more than one year are taxed at 12.5% for amounts exceeding ₹1.25 lakh in a financial year.
Dividend Taxation: Dividends are taxed as per the investor’s income tax slab.
How to Choose the Right Fund?
Investment Objective
For stable returns, choose large-cap funds.
For growth potential, consider mid-cap funds.
For aggressive growth, opt for small-cap funds.
Risk Tolerance
Large-cap funds suit risk-averse investors.
Mid-cap funds are ideal for moderate-risk takers.
Small-cap funds are best for high-risk investors.
Time Horizon
Large-cap funds are suitable for both short- and long-term goals.
Mid-cap funds require a medium- to long-term horizon (5–7 years).
Small-cap funds need a long-term horizon (7+ years).
Market Knowledge
Experienced investors may prefer mid- or small-cap funds for higher returns.
Beginners can start with large-cap funds for lower risk.
Large-cap, mid-cap, and small-cap funds cater to different investor needs, offering a spectrum of risk and return profiles. Large-cap funds provide stability and are ideal for conservative investors, while mid-cap funds strike a balance between risk and return. Small-cap funds, with their high growth potential, are suited for aggressive investors with a long-term perspective.
By understanding their features, benefits, and risks, you can align your investments with your financial goals and risk appetite. Remember, diversification is key to a well-balanced portfolio, so consider including all three categories based on your overall strategy.
DISCLAIMER :
MUTUAL FUNDS ARE SUBJECT TO MARKET RISKS READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
