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Financial planning is the key to a financially secure future. It is best to develop a habit of saving some money routinely and investing it to allow ample growth opportunities. Another smart investment move is not to put all your eggs in one basket. You can diversify your investment into various segments, like stocks, mutual funds, government bonds, real estate, and more.
In this blog, we will discuss the various share market fund categories you can invest in, namely, the small, mid, and large-cap funds. We will also understand the difference between large-cap, small-cap, and mid-cap India to help you choose the best investment option for.
What is Market Capitalisation?
Before discussing small, mid, and large-cap funds, you must first understand the concept of market capitalisation. Market capitalisation is the value of a company’s outstanding shares. It is the total value of the company’s shares held by its shareholders.
Market capitalisation is of 3 types; small-cap, mid-cap, and large-cap. Here is how the Securities and Exchange Board of India (SEBI) categorises various companies into the 3 types:
large-Cap Companies: The top 100 companies listed on the stock market are the large-cap companies. The market capitalisation of these companies is a minimum of ₹20,000 crores.
These blue-chip companies have an excellent track record and a remarkable market presence. Mutual funds that include stocks from these companies are called large-cap funds.
Mid-Cap Companies: The companies that rank between 101 and 250 on the stock market are the mid-cap companies. The market capitalisation of these companies is between ₹5000 to ₹20,000 crores.
These companies have a fairly good track record and have a moderate market presence. Mutual funds that include stocks from these companies are called mid-cap funds.
Small-Cap Companies: The companies that rank above 250 on the stock market are small-cap companies. The market capitalisation of these companies is less than ₹5000 crores.
These include start-up businesses and under-development companies, which do not have a track record. Mutual funds that include stocks from these companies are called small-cap funds.
Now that we understand the various fund types, let us understand the difference between small-cap, mid-cap, and large-cap funds.
Large-Cap Vs Mid-Cap Vs Small-Cap Funds
For a better understanding of the small-cap vs mid-cap vs large-cap difference, here is a detailed analysis of various parameters:
Volatility and Risk Profile
Your investment risk in the stock market depends significantly on the volatility of the stocks you invest in. If a stock’s price is less volatile and remains stable during unfavourable times, it poses a lower risk to your investment.
Difference Based on Risk Profile |
|
Large-Cap Funds |
The stock price of large-cap companies is less volatile and does not fluctuate much, even during turbulent times. Therefore, these funds have a relatively low-risk profile, and they rank on broad market indices, such as Sensex and Nifty. |
Mid-Cap Funds |
Their risk profile is slightly higher than large-cap funds, and the stocks of mid-cap companies are a little more volatile. |
Small-Cap Funds |
The stock price of small-cap companies is very volatile, and it poses a higher risk to investors. |
Growth Potential
The growth potential of the funds decides the returns you can earn on them. The growth prospects of small-cap mid-cap large-cap funds are as follows:
Difference Based on Growth Potential |
|
Large-Cap Funds |
Large-cap funds have low growth potential. However, they are well-reputed funds with better chances of generating stable returns. |
Mid-Cap Funds |
Mid-cap funds have moderate growth potential. |
Small-Cap Funds |
Small-cap funds are considered to have the highest growth potential. |
Returns
You must understand the kind of returns the various fund categories may fetch you. It will help you make an informed decision when you make an investment.
Difference Based on Returns |
|
Large-Cap Funds |
Large-cap funds provide comparatively lower, but stable and consistent returns. The average return on large-cap funds over the last 5 years was 7%. |
Mid-Cap Funds |
Mid-cap funds provide slightly better returns than large-cap funds. Their returns are moderately stable. The average return on large-cap funds over the last 5 years was 10.28%. |
Small-Cap Funds |
Small-cap funds provide excellent returns, which are better than large-cap and mid-cap funds. The average return on large-cap funds over the last 5 years was 14.74%. |
Liquidity
Liquidity means how easily and quickly you can buy and sell shares in the share market without affecting their price too much.
Difference Based on Liquidity |
|
Large-Cap Funds |
Large-cap funds are in high demand for their stable returns and low-risk profile. These funds have higher liquidity. |
Mid-Cap Funds |
Mid-cap funds are moderately stable and offer moderate returns. Their demand is also moderate, so they have moderate liquidity. |
Small-Cap Funds |
Small-cap funds are highly unstable and extremely volatile. These funds have the lowest liquidity. |
Who Should Invest in Small, Mid, and Large-Cap Funds?
Not all fund types are suitable for all investors. You must understand which category to invest in to make the most of your investment. The various types of investors who should invest in the 3 categories of funds are:
- Investment in large-cap funds: Investors with a low-risk appetite may invest in large-cap funds. If you want to invest for a long duration and want stable and consistent returns, this category is for you.
- Investment in mid-cap funds: Investors with a moderate risk appetite and a moderate to long-term investment horizon may invest in mid-cap funds.
- Investment in small-cap funds: Aggressive investors with a short-term investment horizon may invest in small-cap funds. These highly-volatile stocks offer the highest returns and also pose the maximum risk on investment. Therefore, if you are looking for a high-return investment option and are ready to take a substantial risk on your money, you may invest in small-cap funds.
Alternative Investment Options for You
As stated earlier, it is best to diversify your investment into various investment options. You may consider alternative investment options, like fixed deposits, recurring deposits, government securities, and also life insurance. The last one will get you peace of mind knowing that your loved ones will be financially secure in your absence.
The best life insurance plan keeps paying the policyholder long after they have stopped paying its premiums and financially protects their family in the event of their disability or death. Our Tata AIA life insurance plans provide you with tax* savings and wealth creation opportunities along with financial protection for you and your loved ones.
Conclusion
Investments provide ample growth opportunities for your savings. When investing in stocks, choose the fund category based on several factors, like your risk tolerance, the duration for which you want to invest, and the expected returns. You also invest in life insurance plans to diversify your investment and protect your loved ones financially.
