From being a beginner to a pro in the world of mutual funds, you will always stay associated with terms like large cap, mid cap and small cap. Over the years in your investment journey, these three terms will be of immense importance to you, but let us walk you through the basics first.
You can earn potential returns in mutual funds based on your risk appetite and market capitalization.
So, what is market capitalisation?
A company’s shareholders own a certain portion of the overall market’s value. This is known as market capitalisation. The overall worth of any company is determined in the stock market. A ‘market cap’ is determined by multiplying the number of the company’s outstanding shares by the current market price of each share.
There are 3 types of market capitalisations, namely
- Large Cap
- Mid Cap
- Small Cap
According to SEBI’s classification criteria, large cap companies are ranked from 1st to 100th in terms of full market capitalisation. The mutual fund schemes which hold stocks of such companies from the large cap segment are called large cap funds. These funds usually have lower investment risk with good returns. Based on your financial objectives, if you are looking to gain long term returns, large cap funds are definitely for you.Mid Cap:
SEBI states companies ranking from 101 to 250, in terms of full market capitalisation fall under the mid cap segment. These companies also hold a good track record and market presence but with a noticeable difference from large cap companies. Naturally, the risk-return ratio is also proportionately higher compared to large cap funds. If you are looking to take moderate risks with long term returns, then mid cap Funds could be a good investment option for you.
Based on their market capitalisation, companies ranking from 251 onwards are small cap companies, as stated by SEBI. A startup or a moderately young company falls under small cap. These companies are in the building phase of their market value and presence. The risk here is higher and so are the returns in comparison to both large cap and mid cap funds. If you like high stakes and have an appetite for higher risks and aim to earn better returns, then small cap funds could be a good investment option for you. It will benefit you in the short term too based on your financial objectives. Small cap funds have more growth potential compared to large and mid cap funds.
In a nutshell:
The market is categorised by these three essential types of companies and mutual fund schemes basis market capitalisation. The caps define the category of the companies/schemes. It is an easy way of understanding where your money is going. Among other things, large cap companies are less volatile, stable and aim to provide good liquidity. The mid and small cap companies are comparatively more volatile, less stable and provide moderate liquidity with increasing risk as compared to the large cap companies.
So now you can decide where your money can go and in which cap you can invest based on your financial risk appetite and goal alignment.
An investor education initiative by ICICI Prudential Mutual Fund
Visit www.icicipruamc.com/note to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website http://www.sebi.gov.in/intermediaries.html For any queries, complaints & grievance redressal, investors may reach out to the AMCs and/or Investor Relations Officers. Additionally, investors may also lodge complaints on https://scores.gov.in if they are unsatisfied with the resolutions given by AMCs. SCORES portal facilitates you to lodge your complaint online with SEBI and subsequently view its status.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.