Mutual Funds can be differentiated according to market capitalisation or size of the listed companies. The three broad divisions are- Large Cap Funds, Mid-Cap Funds and Small Cap Funds. The company size is an important factor as it brings unique opportunities, involves different degrees of risk and assists the stock picking for equity portfolio.
Through this article, you will be able to understand, differentiate and compare Large Cap and Small Cap Mutual Funds.
Table of Content:
Large Cap V/S Small Cap Fund
According to the categorisation by the Securities & Exchange Board of India (SEBI), a Large Cap fund is an open-ended equity scheme which primarily invests in large cap stocks. On the other hand, a Small Cap Fund invests in small cap stocks.
Difference between Large Cap and Small Cap Funds
Here is a comparison table to understand the difference between large and small cap mutual funds-
| Parameters | Large Cap Mutual Funds | Small Cap Mutual Funds |
| Market Capitalisation | Investments in top 100 companies | Investment in companies ranked below 250 |
| Characteristic | Minimum 80% of the total assets are invested in equity & equity related securities of large cap companies | Minimum 65% of the total assets are invested in equity & equity related securities of small cap companies |
| Risk Involved | Moderately risky | Highly risky |
| Volatility | Less Volatile | High Volatility |
| Liquidity | High | Low |
| Suggested Investment Horizon | At least 3 years | At least 7 years |
| Suitability | Investors with low risk appetite and long term investment perspective | Investors with high risk appetite and expectations of higher returns |
| Returns | Steady returns. May underperform the small & mid cap funds during bullish market | Higher than Large Cap & Mid Cap Funds in the long term |
What are Large Cap Mutual Funds?
Large Cap Mutual Fund schemes refer to the funds which invest minimum 80% of the total assets in the shares of large cap companies i.e, top 100 companies in terms of market capitalisation.
These funds are also referred to as ‘Bluechip funds’. This name is derived from the game of poker in which blue chips hold the highest value on the table. Likewise, BlueChip companies are well-established organisations with stable earnings and highest market value.
Investments in large cap mutual funds bring stability to the portfolio as the large cap companies are not easily affected by market fluctuations. However, the returns from such funds are comparatively lesser than that of small cap or mid cap funds.
Related Blog: Top 5 Large Cap Mutual Funds for 2020
What are Small Cap Mutual Funds?
Small Cap Funds refer to the mutual funds which predominantly invest in companies ranked below 250 in terms of market capitalisation. Such funds invest in equity & equity related instruments of smaller companies including start-ups or small revenue generating companies having a solid business model and growth potential. A minimum of 65% of the total assets are allocated in small cap equity and the remaining can be invested in any of the large or mid cap equity.
It’s a fact that it is easier for an emerging business to double its size than a large company. This projects that investments in smaller companies can be risky but will definitely accrue higher returns. Thereby, Small Cap Funds are highly risky funds but give higher returns as compared to large cap funds.
Also Read: Best 5 Small Cap Mutual Funds for 2020
Which is better for investment Large Cap Funds or Small Cap Funds?
Both large cap & small cap funds have some advantages and disadvantages which define their nature and response to market fluctuations. Let’s check out some factors to further insinuate the choice between these funds:
- Returns
Investment choices are built and initiated according to this one driving force- Returns. The investors of large cap funds should not expect erratic returns. However, the returns from such funds are steady and less volatile because of the asset allocation in strong companies.
On the other hand, small cap funds are underdogs of the financial market and have great potential to give high returns. They are often termed as ‘multi-baggers’ implying their tendency to give more than 100% returns.
- Risk
Both large cap and small cap mutual funds are subject to market risks. However, the degree of risk involved is different in both of these fund categories. Large cap mutual funds have low risk profile. These funds invest in the companies which have a strong market presence for many years and have been performing efficiently during bullish and bearish market conditions.
Unlike large cap funds, Small cap mutual funds are high risk. The Net Asset Value (NAV) of such funds undergo fluctuations with the deviations in the performance of their benchmarks. During market downturns, small cap mutual funds suffer severely because of the investments in emerging businesses. But, you can get higher returns from these funds if you keep yourself invested for a longer time.
- Investment Horizon
Large cap mutual funds are suitable for the investors seeking medium-long term investments. The reason behind this is that these funds often underperform during market slumps. But, this is averaged out when the funds are invested for a longer period of time, leading to returns ranging from 10% to 12%. The individuals who are willing to place their corpus in large cap funds must keep themselves invested for at least 5 to 7 years in order to accrue steady returns.
Likewise, Small cap mutual funds often face erosion of returns during bearish market conditions. This implies that if you wish to generate higher returns, you must keep your money invested for a longer period of time. The suggested investment horizon for Small cap mutual funds is 7 to 8 years.
- Suitability
Large cap funds give steady returns with moderate risk involvement. These funds are usually considered suitable for new investors who are not much aware about how the market functions. Also, the investors with low risk appetite and long term financial goals can opt for large cap schemes.
Small cap mutual funds have high risk but also give higher returns over a period of time. Investors who have sufficient knowledge of market functions and fluctuations can invest in small cap schemes to get expected returns. Since the suggested investment period is 7 to 8 years, these funds are not suitable for investors with short term financial goals.
Conclusion
While you are planning to invest in Mutual Funds, there are a bunch of factors such as the degree of risk involved, financial goals, taxation policy, returns and investment horizon which must be thoroughly analysed in order to make expected gains and avoid losses. Like we just analysed the differences between large cap and small cap funds, every category of funds is different from the other. So, you can track the market movements and understand the working of the fund before you start investing.