Difference between Large Cap and Small Cap Funds
While part of the same universe, large cap and small cap funds cater to different audiences. So, as lucrative as small cap funds might seem, they might be too risky for conservative investors. Similarly large cap funds can feel lukewarm and underwhelming to aggressive investors. This is why understanding the meaning, basics, and differences between large cap and small cap funds is crucial before investing your hard-earned money.
The equity side of the mutual fund universe is divided into three categories based on market capitalisation - large cap, midcap and small cap. A large cap fund invests a significant portion of its assets under management (AUM) in stocks of large cap or blue chip companies. On the other hand, mid cap funds primarily invest in shares of mid-sized companies. Small cap funds typically invest a major chunk in small cap companies which are still in the start-up stage.
The core differentiation lies in the market capitalisation of the underlying stocks. Market capitalisation or market cap is the total market value of the outstanding shares of a particular company. For example, if company A has issued 2 lakh shares and the current market price is Rs. 100 per share, then the market capitalisation of the company will be Rs. 2,00,00,000.
At its core, the market capitalisation of a company is a key determinant of its valuation in the stock market at a particular point in time. Since market cap is one of the major barometers of the size, scale, and market strength of a company, it is used to bifurcate companies into three categories, namely large cap companies, mid cap companies, and small cap companies.
What are Large Cap Companies?
In the Indian context, large cap companies are generally the top 100 companies (in terms of market capitalisation) listed on a particular stock exchange. In India, a company with a market cap of Rs. 25,000 crores or higher is categorised as large cap. Mutual funds investing in the shares of such blue chip companies are termed as large cap funds.
What are Small Cap Companies?
Small cap companies are companies whose total market capitalisation is below Rs. 5,000 crore. These companies are generally ranked 251st or below on a particular stock exchange (in order of market cap). Small cap funds invest in shares of small cap companies.
Large Cap Funds vs Small Cap Funds
| Parameter | Large Cap Funds | Small Cap Funds |
|---|---|---|
| Stability | Large cap funds are generally quite stable, especially in the long term, owing to the high degree of stability displayed by the stock of the underlying shares. | Small cap funds are generally less stable compared to large cap funds since the underlying companies are yet to establish themselves in the market. |
| Risk | Large cap funds carry a lower degree of risk than small cap funds because of the relative strength and market standing of underlying blue chip stocks. | Small cap funds carry higher risk as they invest in stocks of upcoming, start-up companies. |
| Return | The returns from large cap funds are usually moderate but consistent. The average return from large cap funds in the last five years has been 10.93%*. | The returns from small cap funds tend to be higher though not consistent. In the last 5 years, the average return of the small cap category has been 13.04%*. |
| Liquidity | Large cap funds enjoy easy tradability and high liquidity in the stock market. | Small cap funds, though liquid in their own right, carry less liquidity than their large cap counterparts. |
| Growth | Large cap funds have moderate growth potential since blue chip stocks have already achieved their growth spurt. | Small cap funds carry a higher growth potential since the underlying stocks are yet to establish themselves and experience their growth spurt. |
| Ideal for | Large cap funds are ideal for investors with a low risk appetite and a medium-term investment horizon. | Small cap funds are ideal for aggressive investors with a long-term investment horizon. |
Both large cap and small cap funds have their merits, hence it is important to consider your financial goals, risk appetite, and time horizon before you invest in either of them. But whether you invest in large cap or small cap funds, it is crucial that you invest in direct mutual fund plans as you can potentially earn 1-2% additional returns. So, invest in the best mutual funds in India with m.Stock and earn 1-2% extra returns in addition to paying zero brokerage across products for life.
