What is the difference between small-cap, mid-cap, and large-cap funds?

Small cap, mid cap, and large cap mutual fund scheme primarily differ on the basis of size of companies they invest in, their allocation requirements, and risk levels. 

As per general market understanding, large cap funds may offer relatively lower volatility, while mid cap funds may provide a balance of risk and growth potential. Whereas, small cap funds carry comparatively higher volatility and are considered the riskiest among these three financial products.

The right choice depends on an investor’s investment goals, risk appetite, and investment horizon. 

Mutual fund investments can be challenging for beginners because of the sheer variety of options available. If you are planning to add the first mutual fund to your portfolio, a quick search online will introduce you to various types of funds, broadly classified into equity, debt, and hybrid schemes. In case you want to invest in equity-oriented schemes, the three most common sub-categories that you’ll come across are small-cap, mid-cap and large-cap schemes.

So, what is the difference between small-cap, mid-cap and large-cap mutual funds? How do they compare and which one is right for you? You’ll find the answers to these questions and more in this article. 

Let’s begin by understanding what market cap is because it stands for the ‘cap’ in small-cap, mid-cap and large-cap funds. 

Market capitalisation or market cap represents the total value of all the traded shares of a company. It tells you how a company is valued in the market. To find the market cap of an entity, you simply need to multiply the company’s current share price with the number of its outstanding shares. 

Mathematically, this is the formula for the market cap:

Market Capitalisation = Number of Outstanding Shares x Current Market Price per Share

Want an example to make this clearer? Let’s say a company has 10 lakh outstanding shares and each share is currently priced at ₹40 in the market. This means the company’s market cap is ₹4 crore. This means that at that specific point, the public values the company at ₹4 crore. 

Based on their market capitalisation, stocks can be classified as small-cap, mid-cap and large-cap. To group companies into these three categories, the Securities and Exchange Board of India (SEBI) follows these guidelines.

• Large-Cap Stocks: They include the first 100 companies with the largest market capitalisation.
• Mid-Cap Stocks: These are the next 150 companies (i.e. from the 101st to the 250th positions).
• Small-Cap Stocks: They include all the other listed companies from the 251st position.

Now that you know what small-cap, mid-cap and large-cap stocks are, it’s easier to understand how mutual funds are structured based on market capitalisation. These categories are based on how much of a mutual fund’s portfolio is allocated to a specific type of equity. Let’s get into the details.

• Large-Cap Mutual Funds: These schemes invest 80% or more of their assets in large-cap companies. 
• Mid-Cap Mutual Funds: These schemes invest 65% or more of their assets in mid-cap companies.
• Small-Cap Mutual Funds: These schemes invest 65% or more of their assets in small-cap companies. 

In addition to these primary categories of mutual funds based on market capitalisation, the Association of Mutual Funds of India (AMFI) also recognises other categories like:

• Large & Mid-Cap Mutual Funds: In these schemes, 35% or more of the assets are invested in large-cap stocks and 35% or more in mid-cap stocks. 
• Flexi-Cap Mutual Funds: These schemes have dynamic and flexible allocations across small-cap, mid-cap and large-cap stocks, but they must invest 65% or more of their assets in equity.
• Multi-Cap Mutual Funds: These schemes have a minimum fixed allocation for small-cap, mid-cap and large-cap stocks, and they must invest 75% or more of their assets in equity. 

Knowing what small-cap, mid-cap and large-cap mutual funds are is only the first step to making smarter investments. You must also understand the differences between small-cap, mid-cap and large-cap schemes. The table below delves into the comparison between these three categories in detail. 

Factoring in the differences between small-cap, mid-cap and large-cap mutual funds is crucial before you decide where to invest. If you are still having trouble finding the right option for your portfolio, here are some pointers that can help. 

Consider choosing a large-cap mutual fund if:

• You have a low appetite for high volatility
• You are new to equity investing and want a less aggressive entry into the market 
• You prioritise to invest in established companies with  market reputation 

Consider choosing a mid-cap mutual fund if:

• You are looking for a balance between risk and returns in your equity portfolio 
• You are comfortable with moderate volatility if it improves the potential growth 
• You already have large-cap exposure and want to diversify into growth stocks
• You have confidence in certain rising mid-cap companies

Consider choosing a small-cap mutual fund if:

• You have a high appetite for risk and aim for potential  long-term returns
• You are comfortable with sharp market swings
• You want exposure to early-stage companies with a high growth potential 
• You have already covered your core asset allocation and want to chase for potential better gains
• You are planning to invest for a very long time (7+ years)

Understanding the differences between small-cap, mid-cap and large-cap mutual funds is essential to make an informed financial decision and build a balanced investment portfolio. A diversified portfolio can be composed of mutual funds from more than one category, however, it is better to contact your financial advisor to decide the best course of action is to choose the funds that align with your goals, risk preferences, and investment horizon. 

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. What are large cap, mid cap, and small cap in 2026?

Large-cap stocks are the top 100 companies in terms of full market capitalisation, whereas:

• Mid-cap stocks rank from 101st to 250th

and

• Small-cap stocks rank 251st onwards

2. How do large cap, mid cap, and small cap mutual funds invest?

As per SEBI regulations, 

• Large cap mutual funds invest at least 80% of their total assets in equity and equity related instruments of large cap companies.
• Mid cap funds invest at least 65% of their total assets in equity and equity related instruments of mid cap companies.
• Small cap funds invest at least 65% of their total assets in equity and equity related instruments of small cap companies.

3. Which scheme among large cap, mid cap, and small cap mutual funds is the most risky?

As per general market understanding, small cap mutual funds carry higher risk than mid cap and large cap funds. That’s because they invest predominantly (at least 65% of their total assets) in equity and equity-related instruments of small cap companies, which may experience “greater price volatility” than large and mid cap stocks.

An Investor Education and Awareness Initiative by Tata Mutual Fund. 

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