Which type of mutual funds are better: large cap, mid cap or small cap? Why?

 Which type of mutual funds are better: large cap, mid cap or small cap? Why?

Mutual fund (MF) categories are designed so that individuals with different risk appetites and investment preferences can get a scheme that best-suits their profile. Different categories of funds perform differently in different times. Each category will have its own cycle of ups and downs and they may not coincide. Basically, you need to understand what your risk appetite and financial goal is, before choosing the best MF for you. It just boils down to what your investment aim is. To understand this, we need to look deeper into what these categories are and what they signify.

i. Large cap funds: 

They are a type of equity-oriented MFs where a large portion of funds are invested in companies with large market capitalization. These stocks generally have a market cap above Rs20,000cr, and include well established names that have been around for many years. Large-cap companies have strong market presence and their stocks are generally considered to be very safe (low risk). In technical terms, these are companies that rank 1-100, in the equity market in terms of the market capitalization. The objective of this fund is to provide for long-term capital appreciation, by assuming lower risk and providing regular and stable returns. These schemes are suitable for investors who want a moderate but risk-adjusted growth in the long term by investing in the equity market instruments.

ii. Mid-cap funds: 

In this fund most of investment is in medium sized companies. Companies which are not large to begin with, but have potential to grow and develop as large cap companies. In technical terms, these are companies that rank 101-250 in the equity market in terms of the market cap. Such funds hold at least 65% of the assets in mid cap equity and equity instruments. Mid-cap funds are less volatile as compared to small-cap funds and carry lower risk to return ratio. However, when compared to large-cap funds, mid-cap funds are more volatile and have higher risk to return ratio.

iii. Small-cap funds: 

A small cap fund is one which invests in small cap companies. Small cap companies are generally those that have lower revenue base, companies that are in the nascent stage of development and growth, and are thus more prone to volatility and risk as compared to their developed counter-parts like MNCs. This category of stocks is more likely to give aggressive returns but also has the possibility of incurring losses. In a Small-Cap fund, the fund manager can have exposure to stocks of small companies in the range of 70%-90%.

So, in conclusion, I think the funds you should invest in totally depends on your risk appetite. If you are a conservative investor, and don’t want to bear high risk, then large cap is better but if you are an aggressive investor, and you give more prominence to returns, then you can opt for mid or small cap investment.

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Mutual Fund Investments are subject to market risk, read all scheme related documents carefully

*15.08.2024