Have you heard terms like small cap equity funds, mid-cap equity funds and large-cap equity funds? Are you wondering what all of this is about? Don’t worry, we’ll help you understand this.
What are caps in mutual funds?
Companies are divided into different categories depending upon their market size. The total value of a company, i.e. the total outstanding shares multiplied by the market price, refers to the market capitalization of a company.
The Securities and Exchange Board of India, which is a regulatory body for mutual funds in India, categories equity mutual funds depending upon the different types of stocks they invest in, or on market capitalization of companies.
Based on market cap, equity mutual funds are categorized into:
- Large-cap equity funds
- Mid-cap equity funds
- Small-cap equity funds
1. Large-cap equity funds
Large-cap equity funds are mutual funds that invest a majority of investor money in the best large cap stocks. According to SEBI, large-cap funds must invest at least 80% of the total fund’s assets or investors’ money in companies that are categorized as large cap companies.
SEBI defines large-cap companies as those that are the 100 largest companies listed on stock exchanges in terms of their market capitalization. Large-cap funds are less risky when compared to mid-cap equity funds or small-cap equity funds. This is because they invest in the best large cap stocks that have a good performance history. For investors with relatively low risk appetite looking to invest in mutual funds, large-cap equity funds can be a great option.
2. Mid-cap equity funds
Mid-cap equity funds are mutual funds that invest a majority of investor money in mid-cap companies. Just like large-cap company categorization. SEBI defines what a mid-cap company is. According to SEBI, mid-cap companies rank between 101-250 on stock exchanges in terms of their market capitalization. Mid-cap equity funds need to invest at least 65% of the total fund assets in the shares of mid-cap companies.
Mid-cap companies are those that show potential to grow into large-cap companies. However, unlike large-cap stocks, they don’t have an established track record. Mid-cap equity funds carry higher risk than large cap companies since their growth is uncertain. However, they have great growth potential. Investors with a moderate risk appetite looking to grow wealth over the long term can invest in these funds.
3. Small-cap equity funds
Small-cap equity funds are mutual funds that invest a majority of the fund pool in companies with small market capitalizations, or small-cap companies. SEBI defines any company that ranks below 250 on stock exchanges in terms of market cap as small-cap companies.
Small-cap equity mutual funds have to invest at least 65% of their total assets in small-cap companies. The remaining can be invested in other companies or securities. Small cap companies are the riskiest among the three categories of equity mutual funds. However, they also have the potential for most returns. Investors looking to generate wealth and have the ability to stomach risk can invest in small-cap equity mutual funds.
Now that you know the different caps, go ahead and choose what is right for you. Whatever be the cap you invest in, having the right platform to make an informed decision is key as well. Using Mahindra Finance Investment Solutions Portal, you can Invest in a portfolio of mutual fund schemes that is made for you.