Concepts of Small cap, Large cap, Mid cap

Equity Mutual Funds can be categorized based on the market capitalization of the companies they invest in. They can be classified into three types, large-cap, mid-cap, and small-cap funds. In this article, we will look at understanding these funds and talk about the difference between small-cap, large cap and mid cap funds.

Market Capitalization, in simple words, is the market value of the company’s outstanding shares. It is not the share price but the value of the share.

Number of outstanding shares x share price

Based on the market cap, companies are classified as large-cap companies, mid-cap companies, and small-cap companies. In order to ensure that equity schemes follow uniform norms for defining large, mid, and small caps, the Securities and Exchanges Board of India (SEBI) has defined them as follows:

• Large-cap companies: 1st to 100th company in terms of market capitalization
• Mid-cap companies: 101st to 250th company in terms of market capitalization
• Small-cap companies: 251st company onwards in terms of market capitalization

It is important to note that since the share price keeps fluctuating, the market cap of a company keeps changing too. Also, when a company issues more shares to the public, it’s market capitalization increases. On the other hand, in the case of a buyback, the market cap dips. Having understood, market cap, let’s look at large, mid, and small-cap funds.

Large Cap funds are open-ended, equity funds which invest at least 80% of their total assets in large-cap stocks. Large-cap companies are trustworthy and strong companies with an excellent track record. They are known to have generated wealth for their investors.

Mid-cap funds are open-ended, equity funds which invest around 65% of their total assets in equity and equity-related instruments of mid-cap companies. These companies have been around for quite some time and have a good track record too. Some of these will soon transform into large-cap companies. This makes the mid-cap segment an interesting one for growth opportunities with controlled risks.

Small-cap funds are open-ended equity funds which invest a minimum of 65% of their total assets in small-cap stocks. These are the smaller companies or the new entrants in the market. These funds have a high potential for growth but also carry a high amount of risk. They are usually recommended for investors with higher risk tolerance.

Here are some key differences between large-cap, mid-cap, and small-cap funds.