Market Capitalisation: Understanding Mid-cap, Large-cap, and Small-cap Funds

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  • 05 May 2023

Are you exploring how to invest in shares and tips for making a smart stock market investment? Your research may lead you to the concept of ‘market capitalisation’ or ‘market cap’. The term refers to the current market value of a company.

Calculating the market cap of a company is easy. Simply multiply its total number of shares by the present market price of one share. Let’s say Company A has one crore shares with each share selling for Rs 200. This means Company A has a market cap of Rs 200 crore (i.e. 1 crore shares * Rs 200).

Do you plan on making a stock market investment through mutual funds? Mutual funds pool capital from multiple investors to invest in a range of stocks. Depending on their objective, mutual funds may invest in shares across different market caps. Once you understand how the market cap works, you will have a better handle on investment planning. You could then decide whether to make a large-cap fund investment or go for mid-caps and small-caps.

1. Large-cap fund investment

Large-cap funds are mutual funds that focus on companies with large market capitalisation—typically above the Rs 200 billion mark. These are the big players in the market. They are well-established, have good governance practices, and bring steady returns to investors over time.

Large-cap fund investment is an excellent choice if you want to stay invested for the long term. As the underlying businesses are seasoned players, these funds tend to be safe bets. You can expect regular returns without much risk.

2. Mid-cap fund investment

In terms of company size, mid-cap companies sit between large-caps and small-caps. Their market cap ranges between Rs 50 billion and Rs 200 billion. If you are considering a mid-cap fund investment, assess your risk appetite first. Mid-cap funds are riskier than their large-cap counterparts.

However, mid-cap fund investment also offers a greater potential for capital appreciation. Mid-caps may perform very well in a bull market thanks to their aggressive expansion strategies. Under the right conditions, they can outpace large-cap firms. But they may struggle to stay afloat when the markets plummet.

3. Small-cap fund investment

Small-cap funds focus on the smallest players in the market—companies with market caps under Rs 50 billion. These businesses are in the early stages of development and their potential for growth is very high. But they are extremely vulnerable in bearish market cycles and could even go out of business.

Should you take on a small-cap fund investment ? Do so only if your risk tolerance is high. If the underlying companies perform well, you could see generous returns on your investment.

Experts often suggest starting with a large-cap fund investment if you are new to stocks. This would bring stable returns and show you how the markets work. Over time, you could add in a mid-cap fund investment or a small-cap fund investment as well. Investors could also look into the more diversified option of multi-cap funds, which allocate money across all three market caps.

There’s another option too. Open a trading account with a dependable broker like Kotak Securities and invest directly in the stock market. This would allow you to select the individual scrips that you wish to invest in. You could then build a stock portfolio to suit your financial goals, preferences, and needs.

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