Most of us have seen or heard “Mutual Funds sahi hai”. And many of us have been tempted to try out this investment avenue. However, we get scared to take the plunge, thinking that we do not understand the market complexities or the technical jargons.
If these concerns trouble you too, then read on. In this article, we will give you an overview about one of the most used concept in mutual funds ecosystem – Market Capitalization.
Market Capitalization – Meaning and Importance
This will often be one of the important terms that you come across when you start your research on mutual fund schemes. Market capitalization refers to the total valuation of a company. It is calculated by multiplying the share’s market price and the number of outstanding shares.
This value helps in decoding the relationship between three important aspects – size of the company, return potential and the risk involved. Information about market capitalization enables investors to compare between various options based on their current market value and their future prospects.
Companies are classified into three categories based on their market capitalization:
Stocks of well-established, stable and financially sound companies are referred to as Large-cap stocks. These companies have a solid reputation in the industry and history of timely and consistent dividend payouts.Often, they are the market leaders in their respective domains.Their financial reports and other related information are easily available. Such stocks are also referred to as Blue-Chip stocks. As per SEBI circular# dated 6th October’17, large cap companies are 1st -100th company in terms of full market capitalization. The market capitalization of large-cap companies is currently above Rs. 28,000 crores*. Such stocks are considered relatively safer due to the credibility and strong legacy of the company. The price of these stocks is less prone to sudden fluctuations due to market volatility.
101st - 250th company in terms of full market capitalization are defined as Mid Cap as per SEBI circular# dated 6th October’17. The market capitalization of companies with mid cap stocks currently lies between Rs 8,500 to Rs. 28,000 crores*.Such companies are often experienced players in an industry which is on an upward growth path or expected to grow substantially. In terms of risk and return, mid-cap companies lie in between large cap and small cap. Investors get attracted to mid-cap stocks as they have the potential for growth to become a large cap in few years and hence may give reasonable returns in a period of 5-7 years.
As the name suggests, these are companies with very low market capitalization (currently below 8500 crores*) and are 251st company onwards in terms of full market capitalization as per SEBI circular# dated 6th October’17. Many start-up businesses, new companies in niche markets or upcoming industry belong to this category. They are considered a high-risk proposition. Amongst the three, small-cap companies are the most prone to market volatility or an economic downturn, due to their relatively limited market presence, resources or experience. However, people who are able to absorb these risks in the short-term may also stand to benefit substantially if the business flourish in the future.
Mutual Funds have specific schemes wherein the corpus is invested in large-cap, mid-cap or small-cap stocks. There are also schemes that invest across these three options. Having a combination of large-cap, mid-cap and small-cap in one’s portfolio could also be an option. The weightage would depend on each investor’s risk appetite. For instance, generally many first time investors consider investing a majority part of their funds in large-cap mutual fund schemes so as to get relatively stable returns. The balance is then invested in mid-cap or small-cap basis the risk they are willing to take.
We hope we have de-mystified the world of mutual funds for you (atleast to some extent). Do ensure that while selecting the right fund; take into consideration other aspects in addition to the market capitalization.
*As on 31st December’18. These numbers are not constant in nature can change over a period of time basis the market conditions. https://www.amfiindia.com/Themes/Theme1/downloads/Avg.%20Market%20Capitalization%20of%20listed%20companies%20during%20Jul-Dec%202018.pdf
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.