In the world of investments, various types of funds can act as versatile tools, addressing various financial goals. These funds are classified based on key features, including equity or debt focus, diversified or sectoral approach, and whether they offer tax benefits or not. Within the realm of equity funds, a significant distinction arises concerning diversification. Delving deeper, this diversification branches into three primary types dictated by the size of companies they invest in – small, mid, and large.
Referred to as Small Cap, Mid Cap, and Large Cap funds, these categories play a pivotal role in shaping investment strategies. As we explore this intricate classification, we uncover the unique differentiators and advantages that Small, Mid, and Large Cap funds contribute to the dynamic sphere of investments.
Parameters |
Small Cap Funds |
Mid Cap Funds |
Large Cap Funds |
Company Stature |
Focus on small companies, generally below 250th rank in market cap. |
Focus on companies falling between 101st to 250th rank in market cap. |
Invest in large-cap companies, typically top 100 by market cap. |
Growth Potential |
High growth potential, but with higher risk. |
Balanced growth potential, striking a middle ground. |
Stable growth potential, lower risk compared to small and mid-cap. |
Volatility |
High volatility, more susceptible to market fluctuations. |
Moderate volatility, less than small caps but more than large caps. |
Lower volatility, more resilient to market changes. |
Liquidity |
Lower liquidity, may face challenges in buying/selling. |
Moderate liquidity, better than small caps but less than large caps. |
Higher liquidity, easier to buy/sell shares. |
Risks |
Higher risks due to market sensitivity and lower market capitalization. |
Moderate risks, balancing growth and stability. |
Lower risks compared to small and mid-cap funds. |
These funds focus their investments predominantly on equity or equity-related instruments associated with small-cap companies. As per SEBI guidelines, these funds must allocate at least 80% of their total assets to small-cap enterprises, defined as those ranking below the 250th position in market capitalization, having a market cap below approx. Rs. 22,000 crores.
Small-cap stocks may exhibit high sensitivity to market fluctuations, making them susceptible to significant impacts during market downturns. These investments require a longer-term horizon, ideally around eight to ten years, to navigate through market volatility and allow sufficient time for potential returns.
Small Cap Funds present an opportunity for impressive returns that can surpass benchmark performance. While inherently risky, these investments are suitable for those with a higher risk tolerance and a commitment to long-term investing, providing potential for wealth enhancement over time.
The primary risk associated with Small Cap Funds stems from their heightened sensitivity to market movements. Slight volatility can lead to substantial price fluctuations in small-cap stocks, requiring investors to withstand market uncertainties and potential short-term losses.
Over the last decade, small-cap funds showcased a dynamic growth trajectory, rebounding from a challenging -11.2% return in 2013 to a remarkable upswing with a 44.9% return in 2023. This resilient performance highlights the potential for substantial growth in small cap investments.
Mid Cap funds, a distinctive category within the equity funds, concentrate on investing in the equity and equity-related instruments of companies falling within the 101st to 250th rank in terms of market capitalization, as defined by SEBI. Striking a balance between the stability of large-cap stocks and the growth potential of small caps, Mid Cap funds offer a dynamic investment proposition.
Mid Cap companies, situated between small and large caps, exhibit promising growth potential. With market capitalization rankings from 101 to 250, they represent a crucial segment in the investment landscape.
Growth Potential: Mid Cap companies, positioned for growth, may experience substantial stock price appreciation.
Diversification: Introducing mid-cap funds diversifies a portfolio, reducing overall volatility.
Risk Associated with Mid Cap Funds
Mid Cap stocks tend to be more reactive to market changes, leading to increased volatility.
Investors in mid-cap funds should align their choices with a longer investment horizon of 8-10 years, considering the potential for high returns and higher risk tolerance.
Mid Cap funds exhibited noteworthy growth over the past decade, overcoming a setback with a -5.7% return in 2013 to deliver robust performance with a substantial 42.5% return in 2023.
Large Cap funds specialize in investing in stocks of large-capitalization companies, often termed blue-chip companies. These giants, with a capital structure exceeding Rs. 20,000 crores, showcase stability, market resilience, and sound financial health. SEBI designates the top 100 companies with the highest capitalization as blue-chip, forming the core of large-cap funds.
As per SEBI mandate, equity funds that allocate around 80% of their corpus to large-cap company stocks qualify to be large-cap funds. Large-cap or blue-chip stocks generally have a market capitalisation of more than Rs. 65,000 in India.
SEBI lists the top 100 companies with the biggest capitalization as blue-chip companies. These companies owing to their large capital are likely to pay off debt on time, withstand the market turmoil and have a good debt-to-equity ratio.
Diversification: Investors gain exposure to multiple large capital companies, ensuring diversified returns.
Stable Returns: Large-cap funds offer stable returns over the long term, ideal for risk-averse equity investors.
While all equity funds are affected by market conditions, large-cap funds offer relative stability. Although returns may be lower than mid and small-cap funds, they are considered more secure.
Large Cap funds demonstrated consistent growth over the past decade, delivering a commendable 9% return in 2013 and maintaining solid performance with a 17.8% return in 2023.
Investing in small-cap, mid-cap, and large-cap funds is accessible through various avenues. One common method is via mutual funds, where fund managers pool investments and distribute them across companies based on their market capitalization. Investors can choose funds that align with their risk tolerance and financial goals.
Additionally, Unit Linked Insurance Plans (ULIPs) often provide options with exposure to these fund categories, combining insurance coverage with investment opportunities.
Another approach is direct stock investment, allowing individuals to buy shares of specific companies falling under the respective cap categories.
Diversifying across these funds or combining them can create a balanced investment portfolio.
When it comes to financial planning, individuals often grapple with the choice between Unit Linked Insurance Plans (ULIPs) and Mutual Funds.ULIPs, short for Unit Linked Insurance Plans, blend life insurance and investments. In simple terms, they're like two benefits in one package. With ULIPs, you not only get life insurance coverage but also the chance to invest your money. On the other hand, mutual funds pool money from various investors to invest in a diversified portfolio of stocks, bonds, or other securities.
Lock-in Period:
for Unit Linked Insurance Plans
ULIPs: Typically have a lock-in period of 5 years.
Mutual Funds: Generally offer higher liquidity with no mandatory lock-in.
Return on Investment (ROI):
ULIPs: Returns based on the fund's performance.
Mutual Funds: Returns based on the fund's performance.
Tax Benefits:
ULIPs: ULIP plans tax benefits on premiums and tax-free maturity or death benefits.
Mutual Funds: Tax benefits on Equity-Linked Savings Schemes (ELSS) under Section 80C.
Expenses:
ULIPs: Charges include mortality charges, policy administration charges, and fund management charges.
Mutual Funds: Charges involve expense ratios deducted from the fund's NAV.
Interested in learning more about ULIPS?
Click here to explore diverse funds under ULIP and start your financial planning.
Choosing between an existing fund and a New Fund Offer (NFO) depends on your investment goals and risk appetite.
New Fund Offer (NFO) is a fresh scheme introduced to the public, presenting a new investment strategy for the first time, typically offered by Asset Management Companies (AMCs) or by insurance companies with a specific subscription period and an initial price set around Rs. 10 per unit.
Existing mutual funds ULIP schemes, backed by historical data, offer insights into performance, expenses, and fund manager expertise. While existing funds have the advantage of proven track records, NFOs bring fresh opportunities.
Before investing, you should conduct thorough research, considering factors like fund house reputation, objectives, returns of comparable funds, investment goals, and lock-in periods, especially in closed-ended funds.
Exploring the world of equity investments requires a nuanced understanding of Small Cap, Mid Cap, and Large Cap funds. Each category presents unique opportunities and risks. You must align your choices with your financial goals, risk tolerance, and investment horizon.
Disclaimer:
The aforesaid article presents the view of an independent writer who is an expert on financial and insurance matters. PNB MetLife India Insurance Co. Ltd. doesn’t influence or support views of the writer of the article in any way. The article is informative in nature and PNB MetLife and/ or the writer of the article shall not be responsible for any direct/ indirect loss or liability or medical complications incurred by the reader for taking any decisions based on the contents and information given in article. Please consult your financial advisor/ insurance advisor/ health advisor before making any decision.
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