Category : Investing Guides October 3, 20245 minutes read
The key difference between smallcap, midcap, and largecap funds is their market capitalisation, growth potential, benefits, and risks. Usually valued at more than 20,000 crores, large-cap funds invest in companies that are reputable, financially sound businesses that are frequently at the top of their respective sectors. They have slower potential for growth but often offer lower risk and more predictable revenues.
Mid-cap funds invest in companies that are in a growing phase; their market capitalisation ranges from Rs 5000 to 20,000 crores. Compared to large-cap companies, they may provide more growth potential, but at a higher risk. They offer a balance between risk and reward.
The youngest, most volatile, and corporations with the lowest market capitalisation are known as small-cap companies. Small cap funds invest a majority of their corpus in these companies. They may be suited for investors seeking substantial growth prospects because they have the largest development potential but also carry the most risk.
Small-caps offer better growth potential at a higher risk, large-caps give relative stability at a lower risk, and mid-caps aim to strike a balance between risk and growth potential.
When deciding between large-cap and mid-cap investments, you need to take into account many aspects like your investment horizon, intended return, and risk tolerance. This is because each category has varying potential returns and volatility.
To determine this, take a close look at the difference between small-cap, mid-cap and large-cap. The best cap (Large Cap, Mid Cap, or Small Cap) for Systematic Investment Plans (SIPs) depends on individual investor preferences, risk tolerance, investment goals, and time horizon. It is essential to study personal goals and the difference between small-cap, mid-cap and large-cap before investing in an SIP.
Yes, when looking to diversify, there is a big difference between small-cap, mid-cap and large-cap. So, investing in small, mid, and large-cap funds can help diversify your portfolio across different market segments.
A method for evaluating risk based on market size is to carry out a comparison between small and large-cap stocks.
Introduction
To accurately compare large cap vs mid cap vs small cap funds, it is necessary to understand the meaning of market capitalisation. Market capitalisation can be calculated by multiplying the current share price by the total number of outstanding shares. By classifying businesses as large, mid, or small according to their market value, it offers investors and analysts a common measure to compare organisations.
The market capitalisation of a publicly traded company varies in line with the minute-by-minute fluctuations in the market price of its shares. Additionally, the quantity of outstanding shares is subject to change. Thus, market capitalization is not a fixed stable statistic.
To catch you up on the basics, let’s look into what is small-cap, mid-cap and large-cap in India:
- Large cap funds focus on established companies with high market capitalization, providing stability and lower risk.
- Mid cap funds invest in companies with moderate market capitalization, offering a balance of growth potential and risk.
- Small cap funds target smaller, younger companies with high growth potential but greater risk.
The goal of this guide is to offer a thorough understanding of market capitalisation-based equity funds. We will focus on the difference between small-cap, mid-cap and large-cap. We will also cover the attributes, benefits, and meanings of large-cap funds, midcap funds, and smallcap funds.
In addition, the blog will examine how investors can choose among these possibilities in light of their goals, past fund performance, risk tolerance, investment horizon, and current market conditions. This will provide helpful information for making well-informed investment decisions.
Large cap funds are mandated to invest a majority of their corpus in large cap companies. Large-cap firms, typically valued at more than ₹20,000 crores, represent reputable and financially sound businesses that often lead their respective sectors. They may offer slower growth potential but generally provide lower risk and more predictable revenues.
The following are the key features of large cap funds:
Less Volatility and Risk
A key difference between smallcap, midcap and largecap funds is their potential susceptibility to volatility.
In contrast to smaller, less stable companies, large-cap mutual funds may be less sensitive to market changes because they concentrate on financially stable, large, and well-established companies. Usually, this stability draws in investors looking for less risky investment opportunities.
Lower Potential Returns
Large cap corporations may have a slower growth trajectory than mid or small-cap companies because they have already reached a specific degree of growth. They are known for potentially offering consistent returns in comparison to more erratic equities funds.
High Liquidity
Among largecap, midcap and smallcap mutual funds, large cap funds have higher liquidity. This is one of the main benefits of large-cap stocks. With this capability, fund managers can easily reorganise the entire investment portfolio in the event of a down market without suffering significant losses. Additionally, investors have the ability to buy and sell large-cap equities as needed in order to maximise potential profits.
Learn more about large cap funds in India!
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Large cap funds are mandated to invest a majority of their corpus in large cap companies typically valued at more than ₹20,000 crores. These funds may be relatively less volatile and risky as compared to smallcap or midcap stocks. However, this lower risk coincides with comparatively lower returns. Nevertheless, large cap funds are highly liquid and investors can buy and sell large cap equities easily.
To further compare largecap vs midcap vs smallcap funds, let’s explore midcap funds in detail. Midcap funds invest in midcap companies. Mid-cap firms, with market capitalisation ranging from ₹5000 to ₹20,000 crores, are in a growth phase. Compared to large-cap companies, they may offer higher growth potential but also entail greater risk, striking a balance between risk and reward.
Read more about midcap funds in India.
Moderate Volatility and Risk
A key difference between large cap and mid cap funds is their potential vulnerability to volatility. Generally speaking, mid-cap funds may give investors a mix between risk and growth potential. Since they are frequently going through an expansion and development period, they may offer greater growth potential than large-cap equities. But compared to small-cap companies, which are typically younger and less well-established in the market, they typically show less volatility and risk. Because of this, investors looking for growth prospects with a reasonable degree of risk find mid-cap equities interesting.
Moderate Returns
Potential returns are a vital difference between midcap and small cap funds that investors must consider. While smallcap funds may have the potential for significant growth and returns, midcap funds may yield lesser returns. A combination of their market positioning between large-cap stability and small-cap growth potential, mid-cap funds may often yield moderate returns.
Moderate Liquidity
Mid-cap funds have moderate levels of liquidity and volatility. In contrast to small-cap funds, they are therefore less vulnerable to abrupt price fluctuations, but they could also be more difficult to buy or sell than large-cap funds.
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Midcap funds invest in midcap companies with market capitalisation ranging from ₹5000 to ₹20,000 crores, giving investors a mix between risk and growth potential. Since they are frequently going through an expansion and development period, they may offer greater growth potential than large-cap equities but lesser than small-cap equities. These funds are moderately vulnerable to volatility and may generate moderate returns. However, they have moderate levels of liquidity, making them more difficult to buy or sell than large cap funds.
To accurately understand the difference between smallcap, midcap, and large cap funds, let’s delve into what small cap funds are. Smallcap funds invest in small cap companies with market capitalizations under ₹5,000 crores—offer significant growth potential but also greater risk because of volatility and reduced liquidity.
As such, they may be suited for long-term investors who can tolerate higher levels of risk. They may be suited for investors seeking significant growth opportunities. They have the highest growth potential but also carry the highest risk among the three categories.
Let’s look into the features that define small cap funds.
High Risk and Volatility
A prominent difference between small and large cap funds is their vulnerability to volatility. Investing in small-cap funds comes with a higher risk as smallcap companies may be more susceptible to market swings, especially during recessions and other downturns in the economy. Small-cap stocks typically bear the brunt of market downturns more severely than larger, more established companies, and they may require more time to bounce back. Due to the delayed recovery process, small-cap investments may be more volatile and risky, necessitating a longer-term outlook and higher risk tolerance from investors in order to successfully navigate market swings.
Higher Potential Returns
While understanding the difference between smallcap, midcap, and large cap funds investors must consider the potential returns. Although small cap funds have a higher level of risk, they may give higher returns. This is because companies in which small-cap funds invest have a higher potential for growth than large-cap or mid-cap funds. Small-cap funds have traditionally demonstrated the ability to provide superior returns.
Although small-cap funds may have the potential to yield higher returns, investors should carefully examine their investment horizon and risk tolerance before allocating assets to this category.
Low Liquidity
Small-cap companies are often smaller and have lower trading volumes. As a result, their stocks tend to be less liquid. As these are smaller companies, vulnerable to volatility, fewer investors may want to buy or sell these equities. As a result, bid-ask spreads may widen and transaction costs may increase.
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Smallcap funds invest in small cap companies with market capitalizations under ₹5,000 crores. Investing in small-cap funds comes with a higher risk as smallcap companies may be more susceptible to market swings, however, they may also generate wealth in the long-term. Nevertheless, smallcap companies, owing to their size, have lower trading volumes. Consequently, they are relatively less liquid.
The following is the difference between small-cap, mid-cap and large-cap.
| Parameters | Large cap | Mid cap | Small cap |
| Risk | Large-cap funds may be safer in comparison to mid and small-cap funds. | Midcaps may be riskier than large cap funds but potentially safer than small cap funds. | Small-cap funds are associated with higher risk, and market fluctuations impact their performance. |
| Volatility | When comparing, small cap vs mid cap vs large cap, large-cap funds have less volatility and risk. | Mid-cap funds have medium volatility and risk. | High risk and volatility. |
| Liquidity | Higher liquidity, easier to buy and sell shares. | Moderate liquidity. | Less trading liquidity in small-cap stocks. |
| Growth Potential (of companies) | Lower growth potential but more stability and predictability. | Moderate growth potential with comparatively lower volatility. | Higher growth potential. |
| Potential returns | Large-cap companies grow slower than mid- or small-cap companies, offering stable but potentially lower returns. | A combination of their market positioning between large-cap stability and small-cap growth potential, mid-cap funds often yield moderate returns. | When comparing the
difference between small-cap and mid-cap, Small-cap funds may have the potential to yield higher returns. |
| Suitable for | Suitable for relatively medium to low-risk-return investors. | Works best for medium risk-return investors. | When choosing between small cap vs mid cap vs large cap, Investors must know small cap carries a very high risk-return and is suitable for long term investors. |
By carefully considering the difference between small, mid and large-cap, investors can make informed decisions that align with their individual financial goals and risk tolerance levels when choosing between large-cap, mid-cap, or small-cap funds.
Risk Tolerance
Determine your level of comfort with possible changes in the value of your investments. Because small-cap funds are more volatile, they entail a larger risk than large-cap funds, which generally provide lesser risk.
Investment Horizon
Large-cap, midcap, and small cap funds may be suitable for investors with a long-term investment horizon. Small-cap funds have the longest investment horizon – over 10 years. This longer time horizon may allow investors to ride out volatility. Midcap funds may be suitable for an investment horizon of 7-10 years. Comparatively, large-cap funds may have the shortest investment horizon between 5-7 years as they invest in large companies that may be relatively less vulnerable to market volatility. However, investment horizons may be subject to change based on market conditions.
Investment Goals
After comparing the potential investment horizon and risk of largecap vs midcap vs smallcap funds, make sure your investment goals are in line with each category’s risk tolerance and growth potential. Large-cap funds prioritise stability and lower potential returns, whereas small-cap funds provide better growth potential but at a higher risk.
Historical Performance
Look at past performance to learn how various fund types have done in various market environments. Think about whether past performance fits your expectations and level of risk tolerance. However, past performance is not indicative of future performance. Investors must consider their risk tolerance, goals, and other relevant factors before investing.
Market Conditions
Study the state of the economy and its future for the market. Certain types of funds may perform better in different market circumstances than others.
- Using market capitalisation, investors can compare companies by using a standard that divides them into large, mid, and small caps based on their valuation.
- One of the major points of difference between large cap and mid cap is in terms of volatility and risk. Large-cap funds may be safer, mid-cap funds offer moderate risk, and small-cap funds are high-risk.
- Another factor to consider when comparing large cap vs midcap vs smallcap funds is their potential for growth and returns. Small Cap funds have a higher growth potential and may generate optimal returns. Midcap funds may generate medium returns, in comparison large cap funds may generate lower returns.
- Lastly, large-cap funds have higher liquidity for easier trading, mid-cap funds have moderate liquidity, and small-cap funds often face liquidity challenges.
- Small-cap funds may be appropriate for high-risk, long-term investors seeking significant growth, large-cap funds may be appropriate for investors with low to medium risk, and mid-cap funds may be appropriate for investors with moderate risk.
