What is Large Cap or Mid Cap or Small Cap?

You must be wondering what does it mean when your advisor says “XYZ fund is a Large cap, and it will bring stability to your portfolio”. What is large cap? How will it ensure stability? What is Mid cap then? Or what is small cap stock? They are all equity, so does categorizing them makes any sense or these are just jargons?

Let’s see what they are & how they are recognized by Indian Mutual Funds.

The name has it all… yes SEBI, the regulator of the Mutual Fund Industry has ensured that funds from mutual funds are “true to label”. Means if you want to buy a large cap you should get a large cap.

Well, this is possible if we “standardize” or “fix” the definition of the large-cap and other type of funds.

In the circular dated October 6, 2017, they clearly mentioned:

“It is desirable that different schemes launched by a Mutual Fund are clearly distinct in terms of asset allocation, investment strategy etc. Further, there is a need to bring in uniformity in the characteristics of similar type of schemes launched by different Mutual Funds. This would ensure that an investor of Mutual Funds is able to evaluate the different options available, before taking an informed decision to invest in a scheme.”

So in this very circular, they paved the way for categorizing equity stocks.

Before, I tell What is Large Cap or What is Mid cap & What is Small cap

lets quickly check what is CAP?

Cap stands for Capitalization or simply market capitalization (mcap). Its formula is very simple.

MCap = No of Equity Shares (Available for Trading) X Price

So today if HDFC Bank price is 2200 and the number of shares is 2595090267 the MCAP is 57092 Cr.

Hence Capitalization can:

• Increase or decrease minute by minute on a day market is open as the price
• Increase if the company issues more shares (Follow up Price Offer) or decrease if they buyback.

So back to our Question, if CAP or capitalization is changing every day or minute, how we decide which share is large-cap or mid-cap or small cap?

As per SEBI, the answer to Question – What is Large Cap?

Large Cap: 1st  TO 100th company in terms of full market capitalization. This means Nifty companies plus the next 50 companies.

Mid Cap: 101st -250th company in terms of full market capitalization. Only 150 stocks qualify as Mid Cap shares.

Small Cap: 251st company onwards in terms of full market capitalization. This means more than 4000 companies qualify as a Small cap. This is the largest space for MFs to make a portfolio.

AND the Referee to this is AMFI – The Association of Mutual Funds of India (the guys behind Mutual Fund Accha Hai campaign)

The same above mentioned circular says:

“ Mutual Funds would be required to adopt the list of stocks prepared by AMFI in this regard.”

AMFI would adhere to the following points while preparing the list:

1. Average market capitalization will be computed, If a stock is listed on more than one recognized stock exchange.
2. Full market capitalization will be considered, if a stock is listed in one recognized stock exchange,
3. This list would be uploaded on the AMFI website and the same would be updated every six months based on the data as on the end of June and December of each year.

So you want to know which are Large Cap or Mid Cap Or Small Cap of 2018? Click Here.

The Hard Fact is:

If a Fund Say “I am Large Cap” – It ought to be Large Cap only.

Taking the discussion further let me also elaborate why you should invest in a particular fund.

What is Large cap fund: – these are funds which invest their corpus in companies with large capitalization in the market. These are the funds which invest in giant companies like SBI or Reliance Industries. They are known to provide stable returns.

Benefits of investing in large cap: –

1. Risk level is low: the risk level is low as compare to small and medium cap funds because they are leaders and have market share. For Eg, Reliance Industry has huge earnings from its refinery
2. Potential Returns & Dividend: the stock prices are stable (fluctuate in range) and dividend policies are also well known. These are market leaders & well established in the market.
3. Stability: the funds are stable in market because these are companies who have maintained a good reputation in the market and financial stability.

What is Mid cap fund: – that fund which focuses on investment in companies of a medium range of market capitalization. The mid cap companies offer more growth than large cap peers.

Benefits of investing in mid cap: –

1. Growth Opportunity: the growth opportunity of mid cap fund is higher than large cap funds as these companies are continuously growing in the market and are acquiring market share.
2. Risk level: – the risk level of mid cap funds is more than large cap.
3. Stability or liquidity: – liquidity level of mid cap funds is better than small But they are prone to more price fluctuations then large caps.

What is Small cap fund: these funds invest in companies with small market capitalization.

Benefits of investing in small-cap funds: –

1. Higher growth rate: – small-cap funds provides an exponential growth rate and provide high returns on the funds. All mid caps were small caps some years ago, with high growth rates.
2. Risk: They are risky as they may face illiquidity (finding buyers-sellers) in the market. They also have a risk of disappearing or engage in frauds or price manipulations as the scale of business is small.

You should only invest based on your risk profile & portfolio requirement.

Hope this article clear the basic questions of MF investments like what is large cap or what is mid cap & what is small cap?

Share your views in the comments section below.

This article has contributions from Ms Payal Patwari – Intern Research