Based on market capitalization, investors with amid high-risk appetite aims to invest in mid-cap funds, on the other hand, investors with a low appetite goes for large-cap funds. But if you see the returns that are generated from these funds, the difference will be minimal.
Last year, as per SEBI’s norms, large and midcap schemes would have to invest in a combination of large and mid-sized companies. So, according to SEBI, the large and midcap funds should invest a minimum of 35% of their total asset in large-cap companies and a minimum of 35% of their total asset in mid-sized companies.
Before getting in the details of large and mid-cap funds, lets first get an idea of what is market capitalization? Market Capitalization depicts the size of a company. The product of a company’s outstanding shares and the current price per share of that company gives you the market capitalization of that company. With the continuous change in share price, the market capitalization of a company also changes accordingly.
Now let’s discuss the categorization of market capitalization into large and mid-cap funds.
Large-cap funds invest in large-cap companies with market capitalization of Rs. 20,000 crores or more. The large-cap companies are very dominant in the market with a stable track record. The stocks of these companies are considered less risky and they generate wealth over the long time horizon. These companies are generally well-researched in the market with a minimum risk factor. If you as an investor has a low-risk appetite, then investment in a large-cap fund is an ideal choice. With lower risk, large-cap funds yield steady returns as compared to mid-cap funds.
Mid-cap funds invest in mid-sized companies that lies between large-cap and mid-cap companies with market capitalization ranging between Rs. 5000-20,000 crores. Mid-cap companies are generally the emerging companies with an established business. The stocks of these companies are generally riskier than their larger-cap counterparts. Unlike large-cap companies, mid-cap companies are under-researched and the information is relatively less. If you as an investor is willing to take the risk to get a higher return, then the mid-cap fund is your investment option. Compared to large-cap funds, you need to take high risks to seek a higher wealth appreciation.
Comparison between Large and Mid-cap Funds
Here, we present a brief comparison between large and mid-cap funds based on different parameters.
- As per SEBI’s mandate, based on market capitalization the large-cap funds invests in the largest 100 companies are considered as large-cap companies. Whereas, mid-cap funds invest in the next 150 companies which are marked as mid-cap companies.
- In terms of access to credit, large-cap companies have better access to financing as compared to mid-cap companies as large-cap companies are very dominant in the market. So, during the bearish market, large-cap companies tend to stay stronger.
- The large-cap companies tend to withstand market fluctuations in a more stable manner than mid-cap companies. As large-cap companies have larger market shares, so they are quite stable during the market ups and down. But mid-cap companies are quite volatile during market fluctuations as compared to large-cap companies.
- In comparison to mid-cap companies, generally, large-cap companies are held by both institutional and retail investors. So, large-cap companies are better researched than mid-cap companies.
- Usually, large-cap companies have lower volatility during market fluctuations and are well researched, so these companies have higher valuation premium as compared to mid-cap companies.
- Mid-cap companies have the potential to become the next large-cap companies. So, when these mid-cap companies grow in size alike large-cap companies, then the valuation of these companies will increase. So, mid-cap companies will give you a higher return as compared to large-cap companies.
- Usually, mid-cap companies tend to grab market opportunities faster and capitalize it to yield high capital appreciation as compared to large-cap companies.
- During the bullish market, mid-cap companies generate higher growth rate and yield higher capital appreciation and to perform better than their large-cap counterparts.
- But during the bearish market, large-cap funds more or less are stable i.e, less volatile as compared to the mid-cap companies.
- Mid-cap companies have lower % of free-floating shares than large-cap companies, so the mid-cap funds have more liquidity than large-cap funds. Free-floating shares are the shares which are not held by government, promoters etc.
- Unlike large-cap funds which have a high trading volume, the mid-cap funds have higher price volatility. Because mid-cap companies have a lower trading volume as a result of smaller free-float shares.
- It has been noted that, compared to Domestic Institutional Investors (DII), the volume of Foreign Institutional Investors (FII) has been quite dominant in India’s stock market. Based on previous studies, the price movement of mid-cap funds is affected by local factors while large-cap funds are affected by global factors. So, FII trading mostly invests in large-cap funds as the former one is affected by global factors.