When you make investments in mutual funds, you will come across funds that are categorized based on the market capitalization or market capitalization of the companies in which they invest. To understand what that means, ask yourself how you assess a company’s market value. Is it because of how popular the company seems to be with its customers or because of the price of its stock? The answer is neither.
That’s because customers can love a company but that doesn’t accurately reflect the value and a company’s stock can be Rs. 1,000, but that doesn’t mean it’s more valuable than companies with lower stock prices. Instead, market cap is an accurate way to evaluate a company’s value. It takes into account the company’s stock price and multiplies it by the company’s outstanding shares. Hence, the market capitalization indicates the value or size of a company.
Now that you know what market capitalization is, let’s take a look at the types of mutual funds in India based on market capitalization:
Large-Cap Equity Funds
These are mutual funds that invest primarily in shares of large-cap companies. Large-cap companies are the top 100 publicly traded companies by market capitalization. Reliance Industries Ltd. for example, is listed as one on the Bombay Stock Exchange (BSE) with a market cap of Rs. 15,02,444.35 crore. Large-cap companies are well established and often dominate the industry in which they operate. Think Bharti Airtel, Larsen & Toubro, Nestle India Ltd., etc. That’s why large-cap equity funds are associated with stability and security. However, their return potential is not as high as that of mid-cap and small-cap companies.
Mid-Cap Equity Funds
Mid-cap companies are those between 101 and 250e on an exchange in relation to their market capitalization. Compared to large-cap companies, they are still developing and have the growth potential, allowing mid-cap equity funds to offer better returns. However, they also carry more risk in comparison. When you compare mid-cap stock funds to small-cap funds, the opposite is true.
Small-Cap Equity Funds
Small-cap companies are those listed out of the 251st position and small-cap equity funds mainly invest in it. Small cap companies are relatively newer and smaller companies and therefore, while they have a lot of growth potential, the risk of bankruptcy and volatility is also higher.
Multi-Cap Equity Funds
These are equity funds that invest in companies in the three market capitalizations. The Securities and Exchange Board of India (SEBI) requires multi-cap funds to invest a minimum of 25% in large-cap, mid-cap and small-cap stocks. Multi-cap funds are thus more diversified in terms of the market capitalization of the companies in which they invest.
Like multi-cap equity funds, flexi-cap funds can also invest in companies of different market capitalizations. The distinguishing feature, however, is that they do not have to adhere to mandatory limit values. This means that flexi-cap funds are free to reduce their exposure to mid-cap and small-cap stocks below 25% to zero, given market conditions.
Equity funds classified by the market capitalization of the companies in which they primarily invest have different risk-return profiles and offer different benefits. For example, small-cap stock funds have historically outperformed large-cap funds in boom times. On the other hand, during recessions, large-cap funds have been more stable than small-cap and mid-cap funds. Therefore, when making investment in mutual fundsyou need to take these factors into account.