Mutual Fund Categories & Market Capitalization : What are Large Cap, Mid Cap & Small Cap Funds?

I have recently published an article on Best Equity Mutual Funds to invest in 2016 and have been receiving lot of queries on Mutual Fund categories topic like ;

• What exactly are Large cap or Mid cap or Small Cap funds?
• Large cap vs. mid cap vs. small cap – What’s the difference?
• Is it necessary to allocate money between the various fund categories of mutual funds?

These are indeed very important questions. So first, let’s discuss about what is market capitalization (cap), and then about various types of mutual fund categories based on the market caps.

What is Market Capitalization?

Equity Mutual Funds primarily invest in stocks (company shares) and they are often grouped by the size of the companies they invest in – big, small or tiny. By size we mean a company’s value on the stock market which is known as ‘Market Capitalization’ (or) Cap size. (‘Cap’ or ‘market-cap’ here simply stands for Market Capitalization)

Market Capitalization = Current Market Price of share x Total no of Shares outstanding

    (Outstanding shares = total number of shares in circulation (held) by shareholders)

So if a company has ’10,000’ shares outstanding that are trading at current market prices of say Rs 50 per share, the company’s market cap as of today is Rs 5 Lakh.

Below are top 10 companies by market capitalization on Bombay Stock Exchange (BSE, as on 28-Jan-2016). 

So, if a mutual fund scheme invests a major portion of its corpus in Large companies then it can be classified as a ‘Large-cap’ fund.

Mutual Fund Categories – Different Market Caps – Large Cap, Mid-cap & Small Cap

Equity Mutual Funds can be classified as Large cap, Mid-cap (or) Small cap funds based on the size of the companies in which the fund invests and not the size of the mutual fund itself.

• Large Cap Mutual Funds: Large cap mutual funds invest in large cap companies i.e. companies which have market capitalization of more than Rs 200 billion (Rs 20,000 crore). One can look at the BSE-Sensex or BSE-100 Index as a reference point for large cap stocks. Market capitalization for stocks in the BSE-100 Index, for instance, ranges from Rs 200 billion to Rs 3,500 billion.
  • Example : Birla Sunlife Frontline Equity

• Mid-cap Mutual Funds : The mid-cap oriented mutual fund schemes invest in companies having moderate market capitalization, ranges from Rs 50 billion to Rs 200 billion.(BSE Mid-cap index can be considered as the reference point)
  • Example : HDFC Mid-cap Opportunities Fund. Around 26%, 52% & 16% of fund’s assets have been invested in  Large, Mid & Small cap stocks respectively.

• Small-Cap Mutual Funds:  The Small-cap oriented mutual fund schemes invest in companies having small market capitalization ie less than Rs 50 billion. (BSE Small cap index can be considered as the reference point for small cap stocks)
  • Example : DSP Micro-cap Fund. Around 37% & 68% of fund’s assets have been invested in mid-cap and Small-Cap stocks respectively.

Besides above, you might have also heard about ‘Multi-cap’ funds or Diversified Equity Funds. So what are multi cap funds?

Multi-cap Funds are diversified mutual funds which can invest in stocks across market capitalization. The scheme’s assets can be invested in shares of large, medium (or) small size companies.

How to check if my mutual fund is a Large Cap or Mid cap fund?

• Investment Objective of the MF Scheme: You can get a rough idea about the type of the fund or to which fund class it belongs to by going through the MF Scheme’s investment objective. (You can visit mutual funds section of moneycontrol.com and click on ‘overview’ of any mf scheme to know its investment objective)
  • For example : The investment objective of ICICI Prudential Focused Equity Fund is : “It is an open-ended equity scheme that seeks to generate long-term capital appreciation and income distribution to unit holders from a portfolio that is invested in equity and equity related securities of about 20 companies belonging to the large cap domain and the balance in debt securities and money market instruments”.
  • So this ICICI Fund primarily invests in Large cap companies and hence it is classified as a Large cap mutual fund.
• You can analyze the Mutual Fund Scheme’s Portfolio and get to know if it is a Large cap or mid-cap or a multi cap fund.
  • You may visit valueresearchonline.com and click on ‘portfolio’ option of any mutual fund scheme.
  • For example : Franklin India High Growth Companies Fund has been classified as Multi-cap or Diversified Equity Fund.  Around 60% (50+12.9) of the fund’s portfolio is invested in Large cap stocks, 30% in Mid-cap stocks and around 6% in small cap stocks.

Which Mutual Fund market cap suits me?

If you would like to construct the best mutual fund portfolio, you need to allocate monies across the various market cap funds. Kindly note that market capitalization is one the important factors only and your investment plan should be based on other important factors like your financial goals, time-frame, mutual fund scheme’s investing style, load factors and taxation.  (Pic source : karvyvalue.com)

Below are some of the important points to ponder upon;

• Large-cap funds can be great for investors who would like to take moderate risk. Large cap funds can give stability to your MF portfolio.
• If you have an investment horizon of say 5 years, you can consider investing in Large cap or Multi-cap funds.
• Mid & Small funds can outperform the large-cap funds during BULL phases.  But do remember that they may under-perform during the BEAR market periods. They were worse affected in the bear phases in 2008 and in 2011.
• So, Small & Mid-cap funds are more volatile than large cap oriented funds. However, over a long-time horizon (> 7 years) the mid-cap funds have the potential to out-perform the Large-cap funds.
• By investing in small & mid-cap funds and Multi-cap funds , you will be able to have an exposure to a wider variety of stocks which will have a higher potential to do well in the future, in addition to diversifying your portfolio risks.
• If you are an young investor and planning for long-term goals like your Retirement or Kid’s Education goals, I believe that you can consider investing in one or two good Small & Mid-cap oriented funds through SIP mode (Systematic Investment Plan). Small and mid-cap fund & one Diversified Equity fund should definitely form a part of your investment portfolio.

Different market periods can give different returns and past returns may or may not be repeated. So, when you are creating your mutual fund investment portfolio, you can make sure it consists of a combination of large-cap, multi-cap & mid/small cap funds based on your financial goal(s). You should keep a track of your portfolio performance and can make adjustments based on market conditions/your financial situation.

(Image courtesy of foto76 at FreeDigitalPhotos.net) (Risk Vs Return trade-off pic source : karvyvalue.com)