Large Cap, Mid Cap, Small Cap: What Changes When You Move Across Market Cap Categories?

Large cap fund, mid cap fund, and small cap fund are different types open-ended equity mutual fund schemes. They differ based on the types of companies they invest in and the minimum investment allocation requirements.

As per SEBI, large cap funds invest at least 80% of their total assets in equity and equity-related instruments of large cap companies, while mid cap and small cap funds invest at least 65% in mid cap and small cap companies respectively. These differences influence their risk profiles, volatility, and return potential.

Market capitalisation (or “market cap”) is the stock market’s current value of a company’s equity. It is calculated as follows:

● Market Cap = Current Share Price x Total Shares Outstanding.

In India, the large-, mid-, and small-cap labels are assigned based on a company’s rank in terms of full market capitalisation. The top 100 companies are “large cap”, whereas companies ranked between 101st and 250th are “mid cap”, and lastly, companies ranked 251st onwards are “small cap”.

Now, when an equity mutual fund invests in companies across these market capitalisation categories, the schemes are classified as large cap, mid cap, and small cap mutual funds, depending on the companies they invest in.

Confused? Read this article to first individually learn what these mutual fund schemes are, and then learn what changes as you move across these financial products.

As per SEBI, large cap mutual funds are open-ended equity schemes that invest at least 80% of their total assets in equity and equity-related instruments of large cap companies. 

As per general market understanding, large cap companies (the top 100 companies by full market capitalisation) are usually established businesses with a:

• Long operating history
• Developed client base, and 
• Relatively consistent profitability

Such companies may also possess business models to better withstand market downturns than mid or small cap companies, although this can vary across businesses and market conditions.

In terms of “investment risk,”, large cap mutual funds carry very high risk. They remain subject to equity market volatility but relatively lesser than mid caps and small caps and can also incur losses. 

Additionally, their return potential may also be lower than that of mid cap and small cap funds, particularly during periods when smaller companies potentially outperform large cap stocks.

As per SEBI, mid cap mutual funds are open-ended equity schemes that invest at least 65% of their total assets in equity and equity-related instruments of mid cap companies. 

As per general market understanding, mid cap companies (ranked 101st to 250th by full market capitalisation) are usually businesses that may have grown beyond the early stages of their development and are working to expand their market presence. Potentially, they may have:

• Established business models but lesser compared to large caps
• Growing revenues, and 
• Opportunities to enter new markets, launch products, or increase their market share. 

However, their business operations and financial resources may be less established than those of large cap companies. In terms of volatility, mid cap mutual funds may be more volatile than large cap funds. That’s largely because mid cap companies can be more sensitive to:

• Economic changes
• Market fluctuations, and 
• Business challenges. 

At the same time, they may offer greater return potential if these companies expand their businesses and earnings over time. However, their performance can be volatile, and higher returns are not guaranteed.

As per SEBI, small cap mutual funds are open-ended equity schemes that invest at least 65% of their total assets in equity and equity-related instruments of small cap companies. 

As per general market understanding, small cap companies (ranked 251st onwards by full market capitalisation) are usually smaller businesses that are in the early stages of expansion or operate only in specialised markets. Potentially, they may have opportunities to:

• Grow their revenues
• Expand their operations, and 
• Increase their market share

However, they may also have limited financial resources, a shorter operating history, and less established market positions than large cap and mid cap companies.

In terms of volatility, small-cap mutual funds may be more volatile than both large cap and mid cap funds. That’s largely because smaller companies can be more vulnerable to economic downturns, business challenges, and market volatility. 

At the same time, they may offer greater return potential over the long term if the underlying companies grow their businesses successfully. However, their performance can be relatively more volatile , and higher returns are not guaranteed.

The primary difference lies in the size and business maturity of the companies they invest in. As you move from large cap to small cap funds, you generally:

• Migrate from more established businesses 

towards 

• Smaller companies with potentially greater room for expansion, but greater business and market uncertainty. 

Let’s gain more clarity and see how these three categories differ:

Disclaimer: The information provided above is for educational and informational purposes only. These are general characteristics of large cap, mid cap, and small cap mutual funds and may vary depending on market conditions and individual fund portfolios.

So, now you know what large cap, mid cap, and small cap mutual funds are and how these schemes differ. To recap, all three are open-ended equity schemes with different investment mandates. 

Large cap mutual funds invest at least 80% of their total assets in large cap companies, whereas mid cap and small cap mutual funds invest at least 65% in their respective market capitalisation categories.

As you move across these categories, the following characteristics generally change:

• Company Size: Investments shift from established businesses to smaller companies with potentially greater room for expansion.
• Volatility: Volatility generally increase from large cap to small cap funds.
• Growth Potential: Mid cap and small cap funds may offer greater return potential, but returns are not guaranteed.
• Market Sensitivity: Smaller companies may be more vulnerable to economic downturns and changing investor sentiment.

For more information, you can visit www.tatamutualfund.com/deshkarenivesh. The Investor Service Centre of Tata Asset Management Pvt. Ltd. is located at Mulla House, Ground Floor, 51, M.G. Road, Near Flora Fountain, Mumbai – 400 001, Maharashtra. The office hours are Monday to Friday, 9:00 AM to 5:30 PM. For assistance, you can also call (022) 6282 7777 from Monday to Saturday, 9:00 AM to 5:30 PM, or email service@tataamc.com

1. Can I invest in large cap, mid cap, and small cap mutual funds at the same time?

Yes, you can invest in all three categories to diversify your equity mutual fund investments across companies of different sizes. However, holding multiple funds does not automatically ensure diversification, as their portfolios may “overlap”. 

A potentially better approach? You may review your existing portfolio and compare the underlying holdings of different funds to identify overlapping investments. Now, you may add other funds, which provide exposure to companies not already represented in your portfolio. 

2. Can small cap mutual funds give higher returns than large cap mutual funds?

Comparatively, small cap mutual funds may potentially deliver higher returns when their underlying companies grow and outperform larger businesses. However, they are relatively more volatile and can also experience steeper declines during market downturns. 

3. Can I lose money by investing in large cap mutual funds?

Yes, large cap mutual funds are also exposed to equity market risk. Their NAV (Net Asset Value) can fall when stock prices decline, economic conditions weaken, or the companies they hold underperform. 

Although large cap funds generally carry lower volatility than mid cap and small cap funds, they do not guarantee capital protection or returns.

An Investor Education and Awareness Initiative by Tata Mutual Fund. 

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