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As the financial market continues to evolve, investors have become more aware and are always seeking for opportunities to grow their investments. One subcategory of mutual funds that stands out for offering equity exposure is the equity mutual fund, allowing investors to earn capital gains based on the stock market’s performance.
But did you know that equity funds are further subcategorized based on market capitalization, with each having a different risk profile, liquidity, return and growth potential? Understanding the basics of each can help you invest in equity funds that align with your investment goals and objectives. So let’s take a closer look.
Large-cap funds – Largest 100 companies listed on a stock exchange by market value
Large-cap equity mutual funds typically invest in companies with market capitalization greater than Rs 20,000 crore. These companies tend to be well-established and have a successful track record. Large-cap funds are generally considered to be less risky than other types of equity funds, as these companies tend to have a wide distribution network, strong fundamentals, and more stable earnings and cash flows due to their size.
Mid cap funds – Rank among the top 101-250 companies
Mid-caps companies generally have a market cap between Rs 5,000 crore and Rs 20,000 crore. These companies are smaller than large caps but still have a relatively long track record of success and profitability.
While they may not provide the same level of dividend payouts or bonus shares as large caps do but are still established enough to provide some stability with capital appreciation. This makes them an attractive equity fund investment for long-term investors looking for positive returns without taking too much risk.
Small cap funds – Ranked from the 251st position onwards
The market capitalisation of small cap funds is less than Rs 5,000 crore. These types of stocks offer investors higher growth potential as compared to large or mid-cap stocks but also come with higher levels of risk due to their smaller size. Therefore, these mutual fund schemes require careful consideration from investors when selecting which ones to buy or sell at any given time.
Understanding the differences between small-cap, mid-cap and large-cap funds
| Large cap | Mid cap | Small cap | |
| Ideal for | Risk averse investors having a long-term investment horizon | Moderately to high risk-tolerant investors | Aggressive investors |
| Risk | Lower risk | Riskier than large cap | Highly volatile |
| Potential for growth | Offer consistent and stable returns with less susceptibility to dramatic fluctuations. | Moderate growth potential | Considered to be high |
| Liquidity | Higher liquidity as squaring off positions is easier | Slightly volatile and quite liquid | Not very liquid |
So, which equity fund to invest in?
If your primary goal is to maximise capital appreciation while accepting a higher degree of risk, small-cap funds may be a suitable choice due to their higher growth potential.
Mid-cap funds present a balanced approach towards achieving growth and capital preservation, as they invest in companies with strong growth potential while still maintaining a relatively lower risk profile than small caps.
If you prefer a more stable investment that offers long-term wealth protection and steady returns, along with possibly earning passive income through dividends, large-cap funds may better meet your requirements.
Identifying which type of equity fund is most suitable to meet your financial objectives requires a methodical approach and thorough analysis of several important factors. Thus, it’s wise to consult with a financial advisor who can assess your current financial state, growth plans, and risk tolerance to suggest an optimal strategy.
