Difference Between Small Cap, Mid Cap and Large Cap Funds

Companies listed on the stock exchange are categorised into different categories based on sector, industries and their market capitalisation (Market Cap). The fund houses like mutual fund companies also create funds based on the sector and market cap.

The market capitalization in the stock market is classified into large capitalisation, medium capitalisation and small capitalisation stocks. The difference between the small-cap, mid-cap, and large-cap is the size of the market cap, but there are certainly more things you need to understand so that you can make the right decisions about which type of funds you should invest.

Large Cap, Mid Cap and Small Cap: Meaning

Market cap is used as an abbreviation for market capitalisation, which refers to the total market value of a company listed on the stock exchange. To calculate the market capitalisation you have to multiply the current market price of the share with a total number of outstanding equity shares. Based on this market cap, the stocks are classified into different classes of shares.

Based on these market capitalisations, the stocks are categorised as large-cap, mid-cap and small-cap. Mutual fund companies selling the ETFs invest their corpus based on these market caps and categorise the fund into large-cap funds, mid-cap funds and small funds. You can choose to invest the funds sold by mutual fund companies or can directly buy the shares of large, mid or small-cap companies as per your investment goals and risk profile.

Difference Between Small Cap, Mid Cap and Large Cap

As the market capitalisation represents the market value of the company there are certain various aspects that make the large-cap, mid-cap and small-cap different from each other. Let’s find out the key difference between large cap, mid cap and small cap in India.

Large-cap Companies    

The large-cap stocks or listed companies with a market capitalisation of Rs 20,000 crore or more are classified into the large-cap. In the stock market index, large-cap stocks are ranked from 1 to 100 and usually, the biggest companies operating in the country have the largest chunk of the pie in the revenue and income in the industry or sector. The large-cap stocks are also better known as “Blue chip stocks” and are usually included in the benchmark indices.

Mid-cap Companies    

Mid-cap companies are those having a market capitalisation between Rs 5,000 crore to Rs 20,000 crore. Based on their market capitalisation, the stock of these companies are ranked between 101 to 250 and are medium-sized companies, or you can say smaller than the large-cap but bigger than the small-cap companies with the potential to become large-cap in future.

Small-cap Companies

The small-cap companies are those having a market capitalisation of less than Rs 5,000 crore and are next to the mid-cap size companies. These small market cap companies are ranked above 250 and in the race to become the mid-cap companies with the potential to grow in their revenue, net income and market value of their shares in the future.        

Difference Between Large Cap, Mid Cap and Small Cap Funds

Large-cap Funds: When mutual fund companies or fund houses invest their corpus of investment into only large-cap companies stocks, to further sell to investors in the ETFs, then it is called the large-cap funds. Investing in these, companies possess less risk and have the potential to give steady and favourable returns over the period.

Mid-cap Funds: The mid-cap funds are the funds invested by the mutual fund houses into the stocks of the mid-cap companies. The mid-cap companies are smaller than large-cap but larger than small-cap and have a higher risk than the large-cap stocks. However, mid-cap funds can give good returns compared to large cap and are always in the race to become large-cap stocks.

Small-cap Funds: Small-cap funds are the ETFs or investment funds offered by mutual fund companies with a corpus of investment in small capitalisation companies having a market cap of less than Rs 5,000. Smaller-size companies like start-ups or small enterprises enter the stock market with high growth rates in revenue and income also attract mutual fund companies to invest in such small-cap companies and allow investors to invest in such smaller companies.

Large Cap, Mid Cap and Small Cap: Difference

Aspects	Large Cap Stocks (Funds)	Mid-cap Stocks (Funds)	Small-cap Stocks (Funds)
Type of Companies	These are well-known companies with market leadership in the industry and are also called the “blue chip stocks.	These are established companies with the high growth potential and giving the competition to the large caps.	Small-cap stocks are usually smaller-sized companies operating with low revenue and growing rapidly in the market.
Market Cap Size	Companies with a market cap of Rs 20,000 crore or more are considered as large-cap stocks.	The mid-cap companies have a market capitalization of Rs 5,000 crore to Rs 20,000 crore.	Small-cap companies are valued with a market capitalisation of less than Rs 5,000 crore.
Ranking in Index	The large-cap stocks are ranked in the index at the stock exchange under the 100.	Mid-cap stocks are ranked between 101 and 250 in the stock market indices.	While small-cap stocks are ranked above the 250 in the various market indices.
Risk Levels	Investing in large-cap funds is the least risky as such large-size companies can absorb the various conditions in the business.	The mid-cap funds are also risky compared to large-cap but safer than the small-cap stocks with moderate risks.	Investing in small-cap funds is much riskier and higher than mid and large-cap with various threats in the market.
Volatility Levels	Large-cap stocks or funds are not volatile.	Mid-cap stocks or funds are moderately volatile.	Small-cap stocks are highly volatile in nature.
Returns of Investment	Large-caps stocks or funds move gradually with stability giving the returns in the long term.	Mid-caps have the potential to give comparatively high returns in the long-term investment.	Small-cap stocks or funds have the highest potential to give returns but are highly volatile in nature.
Time Horizon	The time horizon to invest in large-cap funds is long-term to get lucrative returns.	The time horizon for investing in mid-cap funds is long-term for all types of investors.	Small-cap funds could be risky, and there are fluctuations in stock price, but in the long term, the returns would be very high.
Liquidity in Trading	Large-cap funds are easy to buy and sell, as liquidity is very high in this category of stocks.	The liquidity of trading in Mid-cap stocks is significantly lower than large-caps but higher than small-cap.	Small-cap stocks are traded with the lowest liquidity in the market, hence difficult to buy or sell.

 

Conclusion: Large Cap vs Mid Cap vs Small Cap Which is Better?

Smaller-size companies’ stocks are initially traded in the market under the small-cap category but with the time the growth in revenue and market capitalization, these small-cap stocks become the mid-caps. Similarly, mid-cap stocks have the potential to grow in terms of revenue and their share price becomes the large cap but the large-cap stocks after reaching at certain matured levels grow gradually with their slow revenue and market cap growth.

While, from the investment perspective, large-cap stocks or funds are suitable for conservative investors who have the patience to get returns in the long term. While investing in mid-cap is slightly riskier than large-cap stocks, hence it is suitable for investors who are ready to take risks at certain moderate levels with a long-term time horizon.

Nevertheless, small-cap stocks or funds are riskiest from the investing perspective. Hence, if you have a high risk tolerance to put your money into such stocks you can choose the small-cap stocks or funds with the expectations to get high returns. But a proper research and analysis is required at professional levels before investing in such small-cap stocks.

• Author: Religare Broking
• Last Updated: December 4, 2024