Difference between large cap, mid cap and multi cap mutual funds
In the financial market, stocks are often categorized by market capitalisation. What is market capitalisation? It is simply the total number of shares multiplied by their current market price. Based on market cap, you have three categories of stocks: large cap, mid cap and small cap. According to SEBI, large caps are the top 100 companies in terms of market cap; mid caps are those companies that are ranked 101 to 250 and small caps are all the companies after number 251 in market cap.
Large-cap mutual funds invest a larger proportion of their portfolio in large-cap companies. Large cap companies are deemed trustworthy due to their excellent track record of generating income. By investing in large-cap companies, you can get average returns at lower risks. Mid cap funds are those that invest a bigger portion of total assets in equity and equity related schemes of companies that occupy market capitalisation of stocks ranked in the 101 to 250 position. Like large cap companies, mid-cap companies also generally have a decent track record when it comes to generating returns. Small-cap funds, on the other hand, invest a major portion of their total assets in small-cap stocks of companies. While these funds have a higher growth potential, they also carry a significant amount of risk and are ideal for investors with higher risk appetites.
Large Cap Mutual funds:
As the name suggests, these funds invest a sizeable chunk of their corpus in companies with large market capitalization, which have built a certain reputation and trust over time. Usually, a part of Large Cap Index like Nifty 50 or Nifty Next 50, these companies usually are market leaders in their segment and have strong corporate-governance practices, characterised by an established financial track record. If you are investing with a long term perspective, and want steady and consistent returns while lowering some risk, large cap funds are ideal, because though not impossible, chances of something going wrong are less. Large cap mutual funds can generate decent returns and steadily compound your wealth.
Mid Cap Mutual Funds:
These companies or firms might actually do better than large cap firms during a bull phase, but the risk is correspondingly higher, given that the underlying stocks are fundamentally more volatile than large-cap stocks. If you want higher returns, and are willing to take that risk, your portfolio could comprise a certain percentage of mid cap funds. Remember to stay diversified as Mid cap funds are meant for those willing to take a bit more risk, in the hope of getting far higher returns.
Small-cap stocks generally have the highest potential to grow and correspondingly carry the highest risk. Many of these small cap companies have extremely aggressive growth plans, but they are also vulnerable to various external threats making it difficult for them to deal with an economic downturn. If you have a high tolerance for risk and spare funds which you can afford to lose, or if you strongly believe that a specific small company has immense potential, then small caps might make sense for you.
But if you really want the best of all three worlds, there is multi-cap funds, which are diversified mutual funds investing in stocks across the market capitalization spectrum. Usually, these funds are capitalisation agnostic, investing in stocks across the large to small cap spectrum based on prevailing and expected market conditions. Multi cap funds are ideal for those with a lower appetite for risk, but want more bang for their buck.
Whether you focus on large, mid or multi cap funds depends again on your financial goals and your risk taking capability. However, traditionally most investors prefer large cap stocks for their stability and mid and small cap stocks for their ability to deliver high returns, although with a corresponding hike in risk.
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