Mutual fund investments can be challenging for beginners because of the sheer variety of options available. If you are planning to add the first mutual fund to your portfolio, a quick search online will introduce you to various types of funds, broadly classified into equity, debt, and hybrid schemes. In case you want to invest in equity-oriented schemes, the three most common sub-categories that you’ll come across are small-cap, mid-cap and large-cap schemes.
So, what is the difference between small-cap, mid-cap and large-cap mutual funds? How do they compare and which one is right for you? You’ll find the answers to these questions and more in this article.
Let’s begin by understanding what market cap is because it stands for the ‘cap’ in small-cap, mid-cap and large-cap funds.
What is Market Capitalisation?
Market capitalisation or market cap represents the total value of all the traded shares of a company. It tells you how a company is valued in the market. To find the market cap of an entity, you simply need to multiply the company’s current share price with the number of its outstanding shares.
Mathematically, this is the formula for the market cap:
Market Capitalisation = Number of Outstanding Shares x Current Market Price per Share
Want an example to make this clearer? Let’s say a company has 10 lakh outstanding shares and each share is currently priced at ₹40 in the market. This means the company’s market cap is ₹4 crore. This means that at that specific point, the public values the company at ₹4 crore.
Decoding Small-Cap, Mid-Cap and Large-Cap Mutual Funds
Based on their market capitalisation, stocks can be classified as small-cap, mid-cap and large-cap. To group companies into these three categories, the Securities and Exchange Board of India (SEBI) follows these guidelines.
- Large-Cap Stocks: They include the first 100 companies with the largest market capitalisation.
- Mid-Cap Stocks: These are the next 150 companies (i.e. from the 101st to the 250th positions).
- Small-Cap Stocks: They include all the other listed companies from the 251st position.
Now that you know what small-cap, mid-cap and large-cap stocks are, it’s easier to understand how mutual funds are structured based on market capitalisation. These categories are based on how much of a mutual fund’s portfolio is allocated to a specific type of equity. Let’s get into the details.
- Large-Cap Mutual Funds: These schemes invest 80% or more of their assets in large-cap companies.
- Mid-Cap Mutual Funds: These schemes invest 65% or more of their assets in mid-cap companies.
- Small-Cap Mutual Funds: These schemes invest 65% or more of their assets in small-cap companies.
In addition to these primary categories of mutual funds based on market capitalisation, the Association of Mutual Funds of India (AMFI) also recognises other categories like:
- Large & Mid-Cap Mutual Funds: In these schemes, 35% or more of the assets are invested in large-cap stocks and 35% or more in mid-cap stocks.
- Flexi-Cap Mutual Funds: These schemes have dynamic and flexible allocations across small-cap, mid-cap and large-cap stocks, but they must invest 65% or more of their assets in equity.
- Multi-Cap Mutual Funds: These schemes have a minimum fixed allocation for small-cap, mid-cap and large-cap stocks, and they must invest 75% or more of their assets in equity.
The Key Differences Between Small-Cap, Mid-Cap and Large-Cap Mutual Funds
Knowing what small-cap, mid-cap and large-cap mutual funds are is only the first step to making smarter investments. You must also understand the differences between small-cap, mid-cap and large-cap schemes. The table below delves into the comparison between these three categories in detail.
| Particulars | Small-Cap Funds | Mid-Cap Funds | Large-Cap Funds |
| Meaning | These funds invest 65% or more in small-cap companies | These funds invest 65% or more in mid-cap companies | These funds invest 80% or more in large-cap companies |
| Company Size | These are small-cap companies which are ranked 251st and beyond by market cap | These are mid-cap companies which are ranked 101st to 250th by market cap | These are large-cap companies which are which are the top 100 companies by market cap |
| Risk | Carry a comparatively higher risk than mid-cap and large-cap funds | Typically carry lower risk than small-cap funds but higher risk than large-cap funds | Carry market-linked risks, but are generally considered less risky than mid-cap and small-cap funds |
| Liquidity During Market Volatility | Lower compared to mid-cap and large-cap companies | Moderate as they may be less volatile than small-cap funds but more volatile than large-cap companies | High as they may be easier to trade than mid-cap and small-cap companies |
| Suitable For | Aggressive investors | Growth-oriented investors | Conservative or first-time investors |
| Examples of Benchmark Indices | Nifty Smallcap 250, BSE Smallcap etc. | Nifty Midcap 150, BSE Midcap etc. | Nifty 100, BSE 100 TRI etc. |
| Post-Crash Recovery | Comparatively slower and uneven | Comparatively steady if the underlying businesses rebound | Comparatively faster and more reliable due to strong fundamentals |
Small-Cap, Mid-Cap and Large-Cap Mutual Funds: Which One to Choose?
Factoring in the differences between small-cap, mid-cap and large-cap mutual funds is crucial before you decide where to invest. If you are still having trouble finding the right option for your portfolio, here are some pointers that can help.
Consider choosing a large-cap mutual fund if:
- You have a low appetite for high volatility
- You are new to equity investing and want a less aggressive entry into the market
- You prioritise to invest in established companies with market reputation
Consider choosing a mid-cap mutual fund if:
- You are looking for a balance between risk and returns in your equity portfolio
- You are comfortable with moderate volatility if it improves the potential growth
- You already have large-cap exposure and want to diversify into growth stocks
- You have confidence in certain rising mid-cap companies
Consider choosing a small-cap mutual fund if:
- You have a high appetite for risk and aim for potential long-term returns
- You are comfortable with sharp market swings
- You want exposure to early-stage companies with a high growth potential
- You have already covered your core asset allocation and want to chase for potential better gains
- You are planning to invest for a very long time (7+ years)
Conclusion
Understanding the differences between small-cap, mid-cap and large-cap mutual funds is essential to make an informed financial decision and build a balanced investment portfolio. A diversified portfolio can be composed of mutual funds from more than one category, however, it is better to contact your financial advisor to decide the best course of action is to choose the funds that align with your goals, risk preferences, and investment horizon.
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