In this article, we’ll compare Mid Cap Funds and Small Cap Funds on various parameters to better understand the differences between the two and their suitability to diverse investors. These are popular equity mutual fund schemes that have the potential to create substantial corpus of wealth in the long run. Firstly, let’s understand the two briefly.
What are Mid Cap Funds?
Open-ended equity schemes that predominantly invest in equity and equity-related securities of mid-cap companies are known as Mid Cap Funds. These companies are ranked from 100-250 in terms of market capitalization by the Securities & Exchange Board of India (SEBI).
Mid-cap companies are in the middle of their growth curve and are expected to show a substantial rise in their performance and increase their market share gradually. Investment in these firms is relatively riskier than that in large cap firms, but less risky than that in small-cap companies.
What are Small Cap Funds?
Small Cap Funds are those mutual fund schemes that predominantly invest in equity and equity related instruments of small cap companies. These companies have been ranked below 250 in terms of market capitalization.
Small cap companies have a lower market capitalization relative to mid cap and large cap companies, however, the growth potential of such companies is higher. The risk element is also significantly higher in these funds, as there is a high possibility of a small cap business going downhill, or not performing upto the mark.
Mid Cap Funds V/S Small Cap Funds
The major differences between mid cap funds and small cap funds have been tabulated below:
| Parameters | Mid Cap Funds | Small Cap Funds |
| Market Capitalization Rank | 101-250 | Below 250 |
| Portfolio Allocation | Minimum Investment in equity and equity related instruments of mid cap companies – 65% of total assets | Minimum Investment in equity and equity related instruments of small cap companies – 65% of total assets. |
| Returns | Higher Returns than | Fluctuating returns. May outperform large and |
| Risk Involved | Moderately Risky | High Risk Exposure |
| Liquidity | High (Exit Load charged for redemption before 1 year of investment) | High (Exit Load charged for redemption before 1 year of investment) |
| Suggested Investment Horizon | More than 4 years | More than 6 years |
| Suitability | Apt for investors with moderate risk appetite. | Apt for investors with high risk appetite. |
| Volatility | Moderately volatile | Highly Volatile |
Which is better: Mid Cap Funds or Small Cap Funds?
- Returns
The prime reason that drives individuals to invest in mutual fund schemes is the returns they offer. Though volatile, returns from small cap funds are high if the market performs well. Since the underlying companies are in the expansion phase, the chances of earning magnificent returns is very high.
Since the mid cap companies are in the middle of their growth curve, the returns delivered are better than already established large cap firms, but lower than those delivered by small cap firms. However, it should be noted that the returns from mid cap funds are less volatile than those from small cap funds, which makes them a preferred choice for investors who wish to earn stable returns.
- Risk Exposure
Risk exposure of the investment portfolio is an important factor to consider while deciding what kind of fund to invest in. The risk associated with both mid cap funds and small cap funds is high. Although, the risk exposure of small cap funds is higher than that of mid cap funds as the underlying securities are quite sensitive to market fluctuations. Also, small cap firms encounter various governance and quality issues that might hamper their growth in the market.
Investment in mid cap funds is recommended to investors with moderate to high risk appetite. Whereas, for small cap funds, investors should’ve a high risk appetite.
- Investment Horizon of the Investor
Equity securities are known to be highly sensitive to market fluctuations in the short run. Nonetheless, in the long run, as the economy grows, the total market capitalization grows and investors earn huge profits from their equity investment if they remain invested.
To make significant capital gains from investment in equity mutual funds, it is advisable to have an investment horizon ranging from 4-6 years for mid cap funds, and more than 6 years for small cap funds. A long term investment horizon ensures huge capital appreciation as the power of compounding becomes more prominent.
Top 5 Mid Cap Funds to Invest in 2020
| Fund Name | AUM (cr.) | 3 – Year Returns | 5 – Year Returns |
| Kotak Emerging Equity | ₹6,733 | 11.04% | 13.16% |
| Axis Midcap | ₹4,818 | 18.85% | 12.39% |
| DSP Midcap | ₹7,626 | 9.90% | 12.00% |
| L&T Midcap | ₹6,391 | 9.39% | 11.70% |
| Franklin India Prima | ₹7,835 | 7.78% | 9.52% |
{Data as on February13, 2020; Source: Value Research}
Top 5 Small Cap Funds to Invest in 2020
| Fund Name | AUM (cr.) | 3 – Year Returns | 5 – Year Returns |
| SBI Small Cap | ₹3,493 | 14.60% | 15.49% |
| Axis Small Cap | ₹2,084 | 16.49% | 14.29% |
| Nippon India Small Cap | ₹9,064 | 9.89% | 12.22% |
| L&T Emerging Businesses | ₹6,123 | 6.65% | 11.27% |
| HDFC Small Cap | ₹9,872 | 9.65% | 10.80% |
{Data as on February 13, 2020; Source: Value Research}