Mutual fund investments make it easy to diversify your portfolio with equities, bonds, government securities, and even gold. Professional fund managers oversee mutual funds and make calculative investment decisions to bring maximum returns with minimum risks. With various categories available, investors have the flexibility to select a suitable mutual fund as per their investment goals. The most common classification is based on the size of companies invested in, i.e., large cap, mid cap, and small cap.
Each category offers unique advantages, features, risks, and return profiles that can affect your portfolio. So, how to select the right mutual fund? Take a detailed look at these categories and understand the differences to assess how each one fits your portfolio.
Large cap funds – Stability and growth
Large cap mutual funds invest in well-established, dominant, and stable companies with a market capitalisation of Rs. 20,000 crore or more. These top 100 companies are leaders in their respective industries and are known for their good operational management, steady cash flows, and strong market presence.
Features and advantages
- Mitigating market swings– As they focus on big and stable companies, large cap funds carry lower risk than other types of mutual funds. During bear markets, they are more resilient and act as a cushion against potential losses.
- Liquidity– Investments in well-established companies mean that large cap funds have higher liquidity. Investors can easily buy or sell their shares without significantly affecting the market price.
- Dividend potential– Many large-cap companies offer regular dividends, which gives an additional income stream to investors.
Mid cap funds – The sweet spot between growth and risk
Midcap mutual funds invest in companies with a market capitalisation of more than Rs. 5,000 but less than Rs. 20,000 crores. These companies are often in the growth phase and have the chance to become tomorrow’s industry leaders.
Features and advantages
- More room for growth– Mid cap companies are often in the growth phase of their business lifecycle. They have established themselves to a certain extent and show potential for further expansion.
- Growth potential– These companies generally have higher growth potential than large cap companies because they are still in the mid-stages of their development.
- Moderate risk– While midcap funds offer better growth prospects, they are still considered less risky than small cap funds.
Small cap funds – Explore the untapped opportunities
Small cap mutual funds invest in companies with a market capitalisation below Rs. 5,000 crores. These companies are often lesser known because they are new and emerging but have high growth prospects.
Features and advantages
- Undervalued opportunities– Small cap stocks are sometimes undervalued by the market. By investing early in these undervalued companies, investors can benefit from potential upward revaluation as the market recognises their growth potential.
- Market inefficiencies– Sometimes, small cap segments do not get adequate coverage from analysts and institutional investors. This often creates market inefficiencies, allowing investors to discover overlooked opportunities and leverage potential mispricings.
- Portfolio diversification– Since the performance of small cap funds is not entirely correlated with that of large cap stocks, holding small cap funds alongside other fund categories can help spread risk across different market segments.
- Emerging sector exposure– Many small cap companies operate in emerging sectors or niche industries, giving investors exposure to innovative businesses and technologies that can affect the market positively.
Large cap vs. mid cap vs. small cap | Which is the best for your portfolio?
The best mutual fund for you depends on your goals, risk appetite, and time horizon. Large cap funds are suitable for low-risk investors looking for stable returns. Mid cap and small cap funds offer higher potential returns with higher risk and volatility. However, it is important to have a long-term horizon with all these investments.
Moreover, always research mutual funds thoroughly and consult with financial advisors before investing. Review fund performance and their holdings to get a better idea of the fund’s risk-return trade-off. As an investor, you need to find out your risk-taking capacity, financial goals, and investment horizon and align it with the mutual fund scheme.