Category : New to Investing February 3, 20265 minutes read
Small-cap mutual funds invest in equities of small-cap companies that are typically in their early stages of growth. These funds are considered high-risk due to their exposure to market volatility, economic changes, and company-specific factors. In contrast, large and mid-cap mutual funds invest in more established companies across larger market capitalisations, making them relatively more stable and diversified.
As per SEBI guidelines, small-cap funds must invest a majority of their assets in small-cap equities, which increases both their growth potential and risk. While these funds have the potential to deliver substantial returns over the long term, they may experience sharp short-term fluctuations. Large and mid-cap funds, on the other hand, benefit from relatively greater stability, liquidity, and diversification across market segments.
Small-cap mutual funds are a type of mutual fund investment scheme that invests in small-cap equities. These equities belong to small-cap companies and are generally considered a high-risk investment. Contrarily, large and mid-cap funds invest in a blend of large and mid-cap equities. Due to their diversified nature and investment in relatively stable equities, large and mid-cap mutual funds are considered to have comparatively lower risk.
Small cap mutual funds invest in stocks of small cap companies and are consequently considered a high-risk investment option. As per the SEBI mandate, these schemes must invest at least 65% of their corpus in equities of small cap companies. The remainder of their corpus may be diversified across other equities. Due to the significant concentration in small cap equities, the scheme may be vulnerable to market volatility and fluctuations. Nevertheless, small cap mutual funds may have the potential to generate significant wealth in the long run.
Some benefits of small cap mutual funds include:
- Long-term wealth creation potential: Small cap companies may take time to grow their business operations. Over the course of five to seven years, they have the potential to create wealth for investors.
- Investment in emerging businesses: Small cap funds invest in emerging business opportunities and give investors early exposure to niche investments, allowing them to potentially benefit in the long run.
- Active fund management: Small cap funds are actively managed and aim to outperform the underlying index. This is beneficial for investors who are seeking an active investment approach.
Read about long term investments in India.
Large and mid cap funds invest in stocks of large and mid cap companies. They are relatively less risky than small cap investments since large and mid cap companies tend to be more stable. Moreover, the diversification across two market caps reduces overall portfolio risk. Large and mid cap mutual funds are mandated to invest at least 35% of their corpus in large and mid cap equities each.
Some of the benefits of large and mid-cap funds include:
- Long-term wealth creation potential: Large and mid cap funds are a long-term investment option, and investors may benefit by remaining invested for at least three to five years.
- Relative stability: Large and mid cap funds are generally more stable than small cap funds as they invest in established companies. These may include blue-chip companies or mid cap companies that have an established strategy and financial papers, and are less vulnerable to market volatility.
- Diversification: Large and mid-cap funds invest in two types of equities, that is, large and mid cap stocks. This diversification, along with sectoral diversification, allows investors to diversify their portfolio and reduce overall risk. Any underperformance in one sector or market capitalisation can be offset by better performance in the rest of the portfolio.
Learn more about portfolio diversification.
| Parameter | Small cap fund | Large and mid cap fund |
| Meaning | Invests in stocks of small cap companies | Invests in stocks of large and mid cap companies |
| Risk | High-risk investment | Compared to small cap funds, lower risk; however, high-risk in general |
| Returns | Potential for high long-term returns | Potential for high returns, but lower compared to small cap funds |
| Diversification | Diversified across sectors but not market capitalisation | Diversified across two market caps and multiple sectors |
| Liquidity | Small cap stocks are less liquid and have lower trading volumes | Large and mid cap stocks are more liquid and have higher trading volumes |
When comparing small cap vs large and mid cap funds, it is important to consider their risk-return ratio, investment outlook, and vulnerability to volatility and analyse it against your own financial goals and risk appetite. Small cap funds may be suitable for investors with a high-risk appetite seeking high returns. However, they are relatively less diversified and more vulnerable to market volatility. In comparison, large and mid cap funds may be more stable due to their investment in blue-chip companies that can withstand market volatility. While they have the potential to generate wealth in the long run, they may have lower returns compared to small cap funds. Investors must analyse fund performance and asset allocation, and even consult with a financial advisor for personalised financial advice before investing in any scheme.
Invest in Bandhan Small Cap Fund today!
