What Are Small, Mid and Large Cap Funds In India? 

Mutual funds are considered as one of the best ways to invest and save your money. However, on the basis of market capitalisation and risk appetite, the mutual funds are divided into various types such as small cap, mid cap and large cap funds.

Let’s delve into understanding what is market capitalization and what are its types.

What is Market Capitalization?

Market Capitalization, often referred to as market cap, is a measure of a company’s total value as determined by the stock market. It is calculated by multiplying the total number of outstanding shares by the current price of each share. This figure gives investors an idea of a company’s size and worth relative to others in the market.

Regulatory Framework:

In India, the Securities and Exchange Board of India (SEBI) established regulations in 2017 to define and categorise companies based on their market capitalization, aiding investors in making informed decisions into 3 types: Large cap, mid cap and small cap.

Understanding market capitalization helps in assessing a company’s size, investment potential, and risk, providing valuable insights for both new and seasoned investors.

How Market Capitalization is Calculated?

To understand the concept of market capitalisation, let’s use an example.

Suppose ‘ABC’ Company has 20,000 outstanding shares, and each share is priced at ₹20. The market capitalization of ‘ABC’ Company would be calculated as follows:

Market Capitalization = Outstanding Shares×Price per Share

Market Capitalization = 20,000×20=₹4,00,000

Market Capitalization = 20,000×20=₹4,00,000

Thus, the market capitalization of ‘ABC’ Company is ₹4,00,000.

What is Large Capitalization?

Large-Cap refers to companies with a substantial market capitalization, typically ₹20,000 crores or more. These companies are well-established, industry leaders with a significant market share. Due to their size and stability, large-cap companies are often considered safer investments compared to mid-cap and small-cap stocks.

Characteristics of Large-Cap Companies:

1. Industry Dominance: Large-cap companies usually dominate their respective industries. Their significant market share and strong financials make them leaders in the market.
2. Stability: These companies are known for their stability and resilience. They often maintain strong performance even during economic downturns or adverse events. This stability makes them a preferred choice for conservative investors.
3. Established Track Record: Large-cap companies typically have been in business for several decades. Their long-standing operations and solid reputation contribute to their reliability.
4. Lower Volatility: Large-cap stocks are generally less volatile than mid-cap or small-cap stocks. This lower volatility means they experience fewer price fluctuations, making them less risky investments.
5. Potential Returns: While large-cap stocks offer lower risk, they also tend to provide relatively lower returns compared to mid-cap and small-cap stocks. This is due to their stable nature and established market position.

Large-cap companies are often referred to as blue-chip stocks due to their strong market presence and high market value. These stocks are ideal for investors seeking stable returns with lower risk.

What is Mid Capitalization?

Mid-Cap refers to companies with market capitalizations ranging from ₹5,000 crores to ₹20,000 crores. These companies fall between the well-established large-cap companies and smaller small-cap companies in terms of market size and stability.

Characteristics of Mid-Cap Companies:

1. Growth Potential: Mid-cap companies often offer higher growth potential compared to large-cap stocks. They have room to expand and can become large-cap companies over time, attracting investors seeking growth opportunities.
2. Volatility: Investing in mid-cap companies can be riskier due to their higher volatility. Their stock prices may fluctuate more than those of large-cap companies, which can lead to greater investment risk.
3. Track Record: While mid-cap companies typically have a solid track record, it may not be as long or as established as that of large-cap companies. Their market presence and financial stability are generally strong but can vary.
4. Market Presence: Mid-cap companies may not be included in broad market indexes due to their limited market presence compared to large-cap firms. However, they are still significant players within their industries.
5. Investment Attraction: Despite the risks, mid-cap stocks attract investors looking for potentially higher returns. Their growth potential can make them appealing for those willing to accept more volatility in exchange for greater reward.

Mid-cap companies strike a balance between the stability of large-caps and the growth potential of small-caps, offering an appealing option for investors looking for growth with a manageable level of risk.

What is Small Capitalization?

Small-Cap companies are those with market capitalizations below ₹5,000 crores. These companies are ranked from the 251st position onwards in terms of market capitalization and are characterised by their smaller size and significant growth potential.

Characteristics of Small-Cap Companies:

1. Market Capitalization: Small-cap companies have a market cap of less than ₹5,000 crores. Their smaller market size often means they are less established compared to large-cap and mid-cap companies.
2. Growth Potential: Despite their smaller size, small-cap companies can offer substantial growth opportunities. They have the potential to expand rapidly and could become mid-cap or large-cap companies in the future.
3. Volatility and Risk: Small-cap stocks are known for their volatility. The companies are generally newer or still developing, leading to higher investment risk. Their success is less certain, making their stock prices more susceptible to significant fluctuations.
4. Market Presence: Small-cap companies often lack inclusion in broad market indices due to their limited market presence. This can make them less visible to the general investor but provides opportunities for those seeking higher risk and reward.
5. Performance Trends: Historically, small-cap stocks have experienced periods of underperformance. However, during economic recoveries or growth phases, they often outperform larger companies, making them attractive to investors looking for high-growth potential.

Investing in small-cap companies can be riskier due to their volatility and uncertain future. However, they also offer the potential for significant returns, especially during economic upswings. Mutual funds that invest in these stocks are referred to as Small-Cap Funds. These funds provide exposure to small-cap companies and can be a strategic choice for investors willing to accept higher risk for potential high rewards.

Difference between Large Cap, Mid Cap and Small Cap Funds

Below is a table to simplify the difference between large cap, mid cap and small cap funds: 

Which Type of Fund is Best For You; Small Cap, Mid Cap or Large Cap?

Here are a few points you can consider before deciding to invest in any one fund. The decision may vary depending on the financial conditions and risk appetite of the investor.

Large-Cap Funds:

• Best For: Conservative investors looking for stable, long-term returns
• Risk Level: Low to moderate
• Investment Horizon: Long-term

Mid-Cap Funds:

• Best For: Moderately risk-tolerant investors with a long-term investment horizon
• Risk Level: Moderate to high
• Investment Horizon: Long-term

Small-Cap Funds:

• Best For: Aggressive investors with high-risk tolerance and a shorter investment horizon
• Risk Level: High
• Investment Horizon: Short to medium-term

While investing in small cap, mid cap and large cap funds, it is crucial to consider factors like your financial goals and the risks you are willing to take. One must do proper research and analysis of the entire share market. It is also a good idea to spread out your investments across the three categories instead of opting for any one category.