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Investment Guide

Difference Between Large Cap, Mid Cap And Small Cap Funds

Difference Between Large Cap, Mid Cap And Small Cap Funds

If you are looking to invest in mutual funds, you have various options available depending on your risk tolerance and market capitalization. Market capitalization is the market value of a company's outstanding shares.

Based on this market capitalization, SEBI classifies companies (and their funds) as Large-cap, Mid-cap, and Small-cap. Each of these mutual funds brings unique growth opportunities, varying returns, and risks to your investment portfolio.

Wondering what is small-cap and mid-cap? Or what is the difference between small-cap, mid-cap, and large-cap funds? And which mutual funds – large-cap, mid-cap, or small-cap India are suitable for what type of investors? Let's get into the details.

What are large-cap funds?

Large-cap funds include the top 100 companies listed on the stock market based on market cap. Also known as blue-chip companies, large-cap companies enjoy a significant market share and a strong presence. Thus, making large-cap funds less volatile to the market conditions and an excellent investment option for risk-averse investors.

Here are a few features and benefits of investing in large-cap funds-

A. Stable returns

Mutual funds are vulnerable to market fluctuations, where the Net Asset Value is affected. However, since large-cap companies are financially sound, the NAV of large-cap funds doesn't fluctuate much, leading to a major difference between large-cap and mid-cap funds. Hence, offering stability to your portfolio at lower risk.

B. Wealth creation

Given their excellent performance and stable earnings, large-cap funds are suitable for wealth creation as these blue-chip companies are in a better position to offer you regular dividends. Thus, providing you better capital appreciation in the long run.

C. Highly liquid

Due to their high market demand, large-cap funds enjoy higher liquidity at a minimum loss, especially during adverse market conditions.

D. Perfect for portfolio diversification

Large-cap funds invest in top companies from different sectors, offering you instant portfolio diversification. This eliminates the need to invest separately in multiple sectors and monitor each fund's performance.

What are mid-cap funds?

Mid-cap companies rank from 101 to 250 with a market cap of around Rs. 5000 crores to Rs. 20,000 crores. While investing in mid-cap funds is considered riskier than large-cap funds, they hold a higher growth potential with the ability to turn into large-cap companies in the long run.

Let's look at some features and benefits of mid-cap funds.

A. Risk factor

As you move from large-cap to mid-cap and small-cap India funds, the growth potential increases. But so does the risk factor. Since mid-cap companies have moderate to robust market presence, they can be riskier than large-cap funds but safer than small-cap funds.

B. Competitive

Mid-cap companies have the potential to grow into large-cap companies, thanks to their market presence. As a result, mid-cap vs. large-cap funds can offer competitive returns in the long run.

C. Expert management

When it comes to the difference between large-cap and mid-cap funds, investing in mid-cap funds lets you enjoy professional management. Most mid-cap funds are handled by experienced fund managers, making them an excellent investment choice.

What are small-cap funds?

Companies with a market cap of less than Rs. 5000 crores are small-cap companies. Small-cap funds hold a negligible market presence, for instance, a start-up or a company still in the developmental phase. Since they don't enjoy a high market share, small-cap funds are highly volatile.

Some of the amazing features and benefits of small-cap funds are as follows-

A. Excellent growth potential

Wondering what is small-cap and mid-cap? Since small-cap companies are still trying to establish themselves in the market than mid-cap and large-cap, they have a limited track record. But while they only have a small market presence, these funds enjoy the highest growth potential.

Moreover, small-cap funds often outperform large-cap and mid-cap funds due to their high growth potential, thus proving to be lucrative investments at times despite the significant risk.

B. Volatility

The risk factor in the stock market is closely related to volatility. Small-cap funds are vulnerable to market fluctuations and hence highly volatile.

C. Investment risk

Since small-cap companies have a small market presence, they may struggle during a recession. Thus, turn out to be riskier than mid-cap or large-cap funds. Having said that, small-cap funds usually offer the most profitable returns for investors willing to take the risk.

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

If you're a beginner in the stock market, you must understand the difference between small-cap, mid-cap, and large-cap mutual funds to maximize returns, minimize risk, and diversify your investment portfolio.

Here's a brief overview of large-cap, mid-cap, and small-cap India.

DifferencesLarge Cap FundsMid Cap FundsSmall Cap Funds
VolatilitySince large-cap companies are well-established, they are less volatile.Mid-cap funds are moderately volatileSmall-cap funds are highly volatile given their constant price fluctuations
GainsOwing to their less volatility, large-cap funds offer steady returns. In 2021, large cap funds average gains of 18-46% in one year. When comparing mid-cap vs. large-cap funds, mid-cap funds offer better returnsEven with the highest risk, small-cap funds offer excellent ROI at times – better than mid-cap vs. large-cap funds
Growth PotentialLarge-cap funds have a lower growth potential since these companies already enjoy a strong market reputation.Mid-Cap funds show a decent growth potentialSmall-cap funds have the highest growth potential because these companies are still developing, but they also come with greater risk.  
RiskConsidering small-cap vs. mid-cap vs. large-cap in India, large-cap funds are less risky  They are relatively riskier than large-cap fundsComparing small-cap vs. mid-cap, these funds have the highest risk profile
LiquiditySince large-cap funds enjoy a high market demand, they provide better liquidity than small-cap vs. mid-cap funds.Mid-Cap funds are moderately liquidSmall-cap funds often have less liquidity because of their negligible market presence

Which funds are ideal for you?

Depending on your risk appetite and investment horizon, you can invest in a healthy mix of large-cap, mid-cap, and small-cap India funds to maintain a diverse portfolio. You can easily diversify your investments across market capitalisations, generating better returns over time. If you're a conservative investor seeking long-term returns, mid-cap vs. large-cap funds would be ideal.

However, if you have a high-risk tolerance and are looking for short-term investment options, small-cap funds offer the possibility of greater returns.

To sum up

As a newbie investor, it is best to research different investment options to fit your financial goals and risk appetite. Now that you know what is large-cap, mid-cap, and small-cap fund, it's time to start your investment journey with Tata Capital's Moneyfy app! Compare and invest in multi-cap funds online for better returns.

Download the app today.

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