Depending on your risk tolerance and market capitalization, you have a variety of possibilities if you want to invest in mutual funds. The market capitalization of a company represents the value of its outstanding shares. One of the best ways to invest and save money for future growth is through mutual funds. Based on market capitalization and risk tolerance, a variety of mutual funds are available.
Those just starting out with mutual funds may have a lot of queries regarding where to invest. But some investors are smart enough to be able to choose the best fund for them based on how they invest. Equity mutual funds are one of these subcategories of mutual funds where investors can put their money to get exposure to equity. This enables investors to make some capital gains, though they are not assured. Based on their market size, equity mutual funds are further divided into subcategories. They are large-cap, mid-cap, and small-cap.
What Exactly Is Market Capitalization?
Market capitalization is the term used to describe the overall value of a company that trades on the stock exchange. The term “market cap” is frequently used, where “cap” stands for capitalization.
As was already said, companies are categorized as large cap, mid cap, or small cap based on their market capitalization. To ensure that equity schemes follow a consistent pattern for defining large, mid, and small caps, SEBI (Securities and Exchange Board of India) has defined the distinct market capitalization as follows –
- Large-cap companies are those ranked between 1 and 100 based on their market capitalisation.
- Mid-cap companies fall between 101 and 250 in terms of market capitalization.
- Small-cap companies are ranked above 250 by market capitalization.
It is significant to remember that as the price of the shares changes, so does the market capitalization.
What are Large Cap Mutual Funds?
Large Cap mutual funds place a greater percentage of their assets in companies with large market capitalizations. These are well-known companies with a strong track record of generating wealth. Large Cap Funds usually benefit their investors over a long period by generating regular dividends. As a result, this aids in the constant compounding of investor wealth. Generally, in comparison to small-cap or mid-cap funds, these funds are low-risk. Therefore, if investors have a low tolerance for risk, they can profit from these funds’ steadier returns. As a result, the investment horizon of these plans is typically long. “Large cap funds” are mutual funds that invest in large-cap companies.
These funds put more of their assets under management (AUM) into the best performers on the market. Large-cap mutual funds invest a considerable amount of their corpus in top-tier companies. These companies are easy to recognize since they are generally market leaders in their particular industrial sectors. They have a strong position in the market, which is why they are known for their robust growth and high profits. Investors may get more capital growth, constant compounding, and steady dividends from these companies.
What are Mid Cap Funds?
Companies that rank between 101st and 250th in terms of market capitalization are considered to be mid-cap stocks or mid-cap companies. Companies with a mid-cap profile have the potential to become large-cap companies. But every coin has two sides. A midcap company is on its way to becoming a large company. There is, however, always a risk of failure. The term “Mid-cap funds” refers to mutual funds that invest in mid-cap stocks.
Midcap mutual funds try to find a good balance between risk and return. These funds are generally less risky than small-cap funds while sometimes having better growth potential than large-cap funds. Mid-cap mutual funds invest mostly in mid-cap companies. Some of these businesses serve emerging markets that are frequently undervalued, underresearched, and thus undervalued. The fund house’s portfolio managers would do a lot of research to find stocks that would be good for the mid-cap fund portfolio. They are quite perceptive to fluctuations in the market. In favourable market situations, they might produce high profits.
What are Small Cap Mutual Funds?
Small-cap mutual funds invest their corpus in companies with small market capitalizations. Small-cap companies are those listed from the 251st position onward in terms of market capitalization. The term “small cap funds” refers to mutual funds that invest in small-cap stocks.
These investments generally carry a high degree of risk and are very volatile. The share prices of small-cap companies are sometimes impacted by even the slightest amount of market volatility. However, when the company grows, these stocks also give investors higher benefits.
Which Funds Are Ideal For You?
You can invest in a balanced mix of large-cap, mid-cap, and small-cap funds to maintain a diverse portfolio, depending on your level of risk tolerance, investment objectives and time horizon. Your investments can be conveniently diversified across market capitalizations, leading to better long-term returns.