One of the most popular ways of categorising mutual fund schemes is in terms of the market capitalisation of the stock they invest in. This is also how the size of the company is defined. Thus, all equity mutual fund schemes can be divided into small, mid, large and multi cap funds based on their investments.
In small-cap fund, the investments are made in small companies which are new and less stable in comparison to better established corporations. These companies are usually start-ups in early stages of development and thus have greater potential to succeed but also have a higher risk of going out of business. If you are looking for aggressive growth and are willing to take greater risks, then investing in small-cap fund can be a good idea.
As the name suggests, mid-cap stocks lie between small and large cap, with a market capitalisation ranging between Rs 50 billion to Rs 200 billion. Mid-cap funds investingthe companies that have some characteristics of the small cap funds but the risk involved is relatively lesser, at least in theory. These funds are lesser prone to the sudden jump or fall in the market, and thus, are more stable in comparison to the small cap funds. So, invest in these schemes if you seek higher capital appreciation, albeit with reasonably higher risk.
Large cap funds are those funds which invest a larger proportion of their corpus in companies with large market capitalization. The large cap funds invest in the companies which are generally described as the big fish of the market with capitalisation ranging between Rs 200 billion to Rs 3500 billion. Large cap funds are the best choice for those who are looking for a long-term investment and prefer to stay away from the risks involved in the sudden ups and downs in the stock market.
Finally, the fundsthat diversify their investments in all the three categories are called multi-cap funds. By virtue of investing in each category, these funds carry much less risk. If one category doesn’t work well, the other can offset the losses, having potentially nil effect. This makes it a suitable scheme for the not-so-aggressive investors
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.