Equity mutual funds can be classified based on their market capitalization. There are three types of equity mutual funds: large-cap, small-cap and mid-cap. We will be discussing the differences between small-cap, large-cap and mid-cap funds in this article.
First, let's review the basics.
Simply put, market capitalization is the value of all outstanding shares in a company. It does not refer to the share price, but the value per share. Let's start by asking you a question.
The share price for Company X is Rs.25, while Company Y's is Rs.60. Which company is more valuable? Which company is more stable?
This question is difficult to answer because the information available is very limited.
Let's say Company X has 500,000 shares and Company Y has 100,000 shares. Which company is more valuable?
This is more logical now. The total value of the outstanding shares in both companies is:
Therefore, Company X is more valuable than Company Y. This is called market capitalization, or market cap. It is calculated using the following formula:
Number of outstanding shares x share price
Companies are classified based on their market capital as large-cap, mid-cap, or small-cap. The Securities and Exchanges Board of India has established these standards to ensure equity schemes adhere to uniform norms.
Important to remember that the share price fluctuates, so the company's market capitalization also changes. The company's market capitalization also increases when it issues more shares to the public. The market cap drops when a buyback is done. Market cap is now understood. Let's examine large-, mid-, and small-cap funds.
These are the key differences among large-cap, small-cap, and mid-cap funds.
|Large Cap Funds||Because they invest in stocks from the 100 largest companies, these funds are considered the safest of the three. The NIFTY 50 companies are the most common.|
|Mid Cap Funds||These funds are more-risker than large-cap investments, but they are less risky than smaller-cap funds.|
|Small-Cap Funds||These funds are the most-risker of all three. The capital base of small-cap companies is low. These stocks have great growth potential, despite the risks.|
|Large Cap Funds||These schemes offer stable returns and lower volatility. In the last five years, the average return has been 7%|
|Mid Cap Funds||These schemes provide better returns than large-cap investments. The average 5-year returns of these schemes are 10.28%.|
|Small-Cap Funds||They are the riskiest schemes and offer good returns. The 5-year average was 14.72%.|
|Role for the Fund Manager|
|Large Cap Funds||These funds invest mainly in large-cap stocks so the fund manager must choose stocks according to the scheme's investment objective. These companies are easily accessible and have stable returns. The fund manager must therefore be more focused on stock selection.|
|Mid Cap Funds||It is difficult to find information about companies in the mid-cap sector. The fund manager must do extensive research on the companies before investing. Mid-cap companies have the potential to grow big. These opportunities must be identified by the fund manager and adjusted accordingly.|
|Small-Cap Funds||A fund manager who has experience in the analysis of small-cap stocks is required to invest in these stocks. These companies can fluctuate rapidly and often fall or rise quickly within days. The fund manager must be in tune with the market at all times.|
|Who should invest?|
|Large Cap Funds||These schemes are preferred by investors who have a lower tolerance for risk and seek investment opportunities in equity markets. It is important to have a long-term vision of your investment goals. It is also suitable for investors who do not seek aggressive returns.|
|Mid Cap Funds||These schemes are best suited for investors who can tolerate moderate risk and want to be exposed to the equity markets. A long-term investment plan is required and you should be comfortable with returns of around 10%|
|Small-Cap Funds||These schemes are designed for investors who can tolerate higher levels of risk. These schemes are suitable for investors who can tolerate volatility in the small-cap space. You can expect long-term returns. Before investing in small-cap funds, you should thoroughly research the manager.|
As you can see, there are large-cap, small-cap, and mid-cap funds that meet different investor needs. Make sure you fully understand your investment goals and create a financial plan before investing.
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