What Is The Difference Between Large Cap, Mid Cap, And Small Cap Funds?

Before investing in the stock market, it is important to understand what large-cap, mid-cap and small-cap funds are. Every fund has a different risk and return profile, and it is beneficial to choose the right category based on your investment goals. According to SEBI, companies are classified into three categories based on their market capitalisation: large cap, mid cap, and small cap. Mutual funds invest in shares of these companies and based on their investment portfolios, these mutual funds are also categorized as large, mid and small cap funds.

In this blog, we will understand in simple language what the difference is between small cap, mid cap and large cap funds and which one may be better for you.

What is Market Capitalization?

When assessing the size of a company, the first thing that comes to mind is its market capitalization. This actually shows the total market value of that company – that is, how much the company is worth today.

The formula is:

Market Capitalization = Current share price × Total number of outstanding shares

SEBI Classification of Large Cap, Mid Cap, and Small Cap

When it comes to understanding the market size and risk associated with a company, SEBI (Securities and Exchange Board of India) market cap ranking is the most relevant guide. SEBI updates the ranking of companies every six months and divides them into three groups based on their size:

• Large Cap: Companies that fall in the top 1 to 100 ranks based on market cap are considered as such. These are usually well-known, strong and stable companies like Reliance Industries, TCS, HDFC Bank, etc.
• Mid Cap: These include companies ranked 101 to 250, which are in the growth stage and have the potential to become large caps in the future. Example: Trent, Cummins India, AU Small Finance Bank, etc.
• Small Cap: Companies that are ranked lower than 251 can be considered as small cap companies. These have the potential to grow rapidly but also have a higher risk associated with them. Example: IndiaMART, RBL Bank, Happiest Minds, etc.

If we understand the concept of small cap, mid cap and large cap, then it can help investors decide mutual funds to invest in and get a better understanding in which type of companies their money is being invested in.

What Are Large Cap Funds?

Large cap funds are mutual funds that invest in companies with a large market capitalization i.e., companies with ranking between top 1 and 100. These companies are known for their strong business models, stable revenues and long track record. Hence, these funds offer the most stability to investors.

Large cap companies usually have established their name and credibility in the market, making their stocks less volatile. This is why these funds have a lower risk and are suitable for investors who want stable and reliable returns over a long period of time.

Advantages:

• Lower price fluctuations
• Stable returns with low risk
• Suitable for long term investors

Disadvantages:

• Lower returns than mid and small cap mutual funds.

What Are Mid Cap Funds?

Mid-cap funds are mutual funds that invest in companies with a market ranking between 101 and 250. These companies are neither too big nor too small, that is, their size is between large and small cap. This is why these funds offer investors a balanced option with a mix of higher returns and safety.

Mid-cap companies are usually in the growth stage, with the potential to become large caps in the future. Hence, their growth prospects are good, but at the same time they are also more volatile.

Advantages:

• Possibility of better returns than large caps
• Lower risk than small caps
• Helpful in maintaining balance in the portfolio

Disadvantages:

• Higher volatility than large caps
• Impact on returns during recessions

Read Also: Best Midcap IT Stocks List

What Are Small Cap Funds?

Small cap funds are mutual funds that invest in companies that rank 251 and below in the market cap rankings. These companies are relatively new, small and have the potential to grow rapidly. Hence, this fund category attracts investors who are willing to take a little more risk to earn higher returns.

Small cap funds are considered to be the most volatile among all the mutual fund categories, but they also have the highest potential to become multibaggers in the long term.

Advantages:

• High growth potential
• Possibility of great returns in the long term
• Opportunity to earn big returns with small investments

Disadvantages:

• High risk and high volatility
• First to be affected in a recession or market downturn

Read Also: 10 Best Small Cap Electric Vehicle Stocks

Small Cap vs Mid Cap vs Large Cap Funds – Key Differences

Feature	Large Cap Funds	Mid Cap Funds	Small Cap Funds
Risk Level	Low risk, more stability	Moderate risk with some volatility	High risk, highly volatile
Return Potential	Stable but relatively limited returns	Higher return potential than large caps	Highest return potential, but comes with greater risk
Investment Horizon	Long-term (5+ years), suitable for retirement or safety	Medium to long-term (5–7 years)	Long-term (7–10 years), requires patience and risk tolerance
Investor Type	Conservative investors seeking steady growth	Investors willing to take moderate risks	Aggressive investors aiming for high growth
Impact of Market Movements	Least affected during market downturns	Moderate fluctuations during market changes	Most affected during market volatility

Which fund is right for whom?

When it comes to comparing small cap vs mid cap vs large cap, the simple answer depends on the investor’s needs and risk profile:

• If one wants stability and does not want to take too much risk, then large cap funds are better.
• If you can tolerate a little higher return and a little risk, then mid cap is a balanced option.
• And if you are ready for long term growth and are not afraid of short term volatility and higher risks, then small cap funds may be for you.

Read Also: List of 10 Top Smallcap Stocks in India on NSE

Which One Should You Choose?

When deciding between large, mid and small cap funds, you should consider the following factors:

• Understand the risk appetite : Every investor has a different risk appetite. Some investors are willing to take more risk, while some want safe and stable returns. If you want a safe investment, then large cap funds are a better option. On the other hand, mid cap and small cap funds offer more risk along with higher returns.

• Pay attention to the investment horizon : If the investment period is short (3–5 years), then large cap funds are most suitable as they provide stability. On the other hand, better returns can be obtained by investing in mid and small cap funds for a long period (5–10 years or more).

• Decide your financial goals : What is your goal? Buying a house, children’s education, retirement planning or wealth creation? If your goal is to keep the capital safe, then a large cap fund is a good option. If your focus is on growth and wealth creation, then mid and small caps can be better options.

• Avoid Concentration in One Category : It is not wise to invest all the money in just one fund category. Diversification is important and it is advised to divide the investment in a balanced manner in all three categories (Large, Mid, Small). This not only reduces the risk, but also offers better risk-adjusted returns in different market situations.

• Think Long-Term & Be Patient : Mutual fund returns are affected by ups and downs in the market, but there is a possibility of good growth in the long term – especially in mid cap and small cap if you are patient and disciplined.

Read Also: Best Small Cap Semiconductor Stocks in India

Conclusion

While investing in the stock market, it is very important to know how large cap, mid cap and small cap funds work and what is the difference between them. Each fund category has its own features – some offer stability, while others offer the opportunity for rapid growth.

If the categories of these funds and their risk profile are understood properly, then investment decisions can be taken more strategically. This understanding not only balances the risk but also gives better returns in the long run. Every investment made with the right information and strategy can bring you one step closer to your financial goal. It is advised to consult a financial advisor before investing.

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