Large-Cap vs Mid-Cap vs Small-Cap mutual funds: Which one is right for you?

Here's a complete guide to choosing the right equity mutual fund for your investment goals.

Equity mutual funds are classified into three types based on market capitalisation: small or micro-cap funds, Mid-Cap funds, and Large-Cap funds. Let's look at them in more depth to see how and where one can consider putting their hard-earned money for optimum profit. 

Investing in mutual funds can be perplexing for first-time investors due to the large number of funds available on various platforms. To reach one's financial goals, it is critical to establish a well-balanced mutual fund portfolio that matches one's risk tolerance. Equity mutual funds are classified into three types based on market capitalisation: small or micro-cap funds, mid-cap funds, and large-cap funds. 

Let's take a look at these in a little detail to understand how and where one may consider parking their hard-earned money for maximum benefit. 

Large-cap mutual funds 

Invest in the giants of the stock market with large-cap funds! 

Large-cap funds are equity funds that invest at least 80 per cent of their total assets in large-cap stocks. Large-cap companies are strong and established companies with a good track record that are comparatively less risky and provide stable returns. They are also more likely to pay dividends than smaller companies. This makes them a good choice for investors who are looking for a safe and relatively stable investment with the potential for regular income. 

Large-cap funds invest in the largest companies, typically those with a market capitalisation ranking from 1 to 100. 

Mid-cap mutual funds 

Grow your wealth with mid-cap funds! 

Mid-cap funds are equity funds that invest a minimum of 65 per cent of their total assets in mid-cap stocks. They invest in medium-sized companies. These companies are not as well-established as large-cap companies, which have the potential for growth and involve more risk than large-cap funds. This makes them a good choice for investors who are looking for higher returns but are willing to take on more risk. 

Mid-cap funds invest in mid-sized companies that rank between 101 and 250 in terms of market capitalisation. 

Also read: Systematic Investment Plan: The simplest way to grow your wealth (Part 1)

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Small-Cap mutual funds  

Dare to dream big with small-cap funds! 

Small-cap funds are equity funds that invest a minimum of 65 per cent of their total assets in small-cap stocks. These are the smaller companies or the ones that are new to the market. These companies are not as well-established as large-cap companies. They have high growth potential but also carry a high amount of risk since they are new. This makes them a good choice for investors who are looking for high returns but are willing to take on a lot of risk. 

Small-cap funds invest in companies ranking 251st onwards in terms of full market capitalisation. 

Let's now discuss how to choose mutual funds. 

When picking which fund to invest in, one must consider their personal financial goals, risk tolerance, and investment horizon, as well as avoid the herd mentality. 

It is important to note that when market capitalisation falls, the risk typically rises since there are smaller firms vulnerable to the danger of not being able to compete with larger companies or unorganised industries.