Difference between small cap, mid cap and large cap funds explained

Be it clothes or coffee, the availability of sizes makes life easier. So why shouldn’t you have the same flexibility while investing your money? Thanks to mutual funds, you can invest as per the size of the company. Financially speaking, you can invest as per market capitalisation. Market capitalisation further helps you understand the difference between small cap, mid cap and large cap funds.

Let’s simplify these financial terms for you.

Decoding market capitalisation

Market capitalisation helps you gauge the value of a company. It is calculated by multiplying the total number of the company’s outstanding shares by the current market price of each share. For example, if Company A issues 10 lakh shares at Rs 100 each, its market capitalisation will be Rs 1000 lakhs.

Based on market capitalisation, companies are divided into small cap, mid cap and large cap companies. Understanding these companies will help you understand the difference between small cap, mid cap and large cap funds.

1. Large cap companies and large cap funds

Large cap companies

Large cap companies are well-established and reputed companies. As per the Securities and Exchange Board of India (SEBI), the top 100 Indian companies in terms of market capitalisation qualify as large cap companies. They have a market capitalisation of Rs 20,000 crore or more.

Large cap funds

Large cap funds are mutual funds that majorly invest in large cap companies. Since these companies have a foothold in the market, large cap funds tend to be the least risky out of the three. These funds are comparatively less volatile and can offer stability, but the returns may be relatively low too.

2. Mid cap companies and mid cap funds

Mid cap companies

Mid cap companies rank from 101 to 250 in terms of market capitalisation. Such companies have a market capitalisation of more than Rs 5000 crore but less than Rs 20,000 crore. Though they are not as established as large cap companies, they are well-known and show the potential of growing further.

Mid cap funds

Mid cap funds are mutual funds that majorly invest in mid cap companies. They may be more unpredictable than large cap funds, but they offer relatively better returns.

3. Small cap companies and small cap funds

Small cap companies

Companies ranking from 251 onwards in terms of market capitalisation are small cap companies. Such companies have a market capitalisation of less than Rs 5000 crore. They are still growing and are yet to get themselves established in the market. Hence, they are unlikely to have a long track record.

Small cap funds

Small cap funds majorly invest in small cap companies. Such funds are considered the riskiest out of the three, but they also have the potential of earning the highest returns.

How to choose between small cap, mid cap and large cap funds

There may be a lot of differences between small cap, mid cap and large cap funds, but one thing that remains common is that they all are equity mutual funds and, thus, volatile. However, due to their market capitalisation, the degree of volatility differs. And, thus, their risk element differs.

If you want to go for the least risky out of the three, you can opt for large cap funds. But if you want to choose the one with the potential of earning the highest returns, then you can opt for small cap funds. You can also opt for mid cap funds if you want moderate returns for moderate risks.

Also, you don’t always have to go for active funds. You can even choose to invest in passive small cap, mid cap or large cap funds. The fund manager’s role is limited in passive investments since the fund tracks and imitates the underlying index.

To sum it up

Mutual funds can be categorised into small cap, mid cap and large cap funds based on market capitalisation. While the first two can be ideal for experienced investors, new investors who want to tap into the potential of equity can opt for large cap funds.  

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