WHAT ARE SMALL CAP AND LARGE CAP FUNDS?
WHAT ARE SMALL CAP AND LARGE CAP FUNDS?Equity Mutual Funds can be categorized based on the market capitalization of the companies they invest in.
They can be classified into three types – large-cap, and small-cap funds.
In this article, we will look at understanding these funds and talk about the difference between small-cap, large-cap, and mid-cap funds.
Read Advantages and Disadvantages of Mutual Funds For More
What are large-cap funds?
Large Cap funds are open-ended, equity funds that invest at least 80% of their total assets in large-cap stocks. Large-cap companies are trustworthy and strong companies with an excellent track record. They are known to have generated wealth for their investors.
Risk profile:
These funds are considered to be the least risky among the three since they invest in stocks of the top 100 companies. Typically, you can think of the companies in the NIFTY 50.
Returns:
These schemes tend to offer steady returns with lower volatility. The average returns are 7% in the last five years.
Role of funds manager:
Since these funds primarily invest in large-cap stocks, the fund manager needs to choose stocks based on the investment objective of the scheme.
The information of these companies is easily available and their returns are usually stable. Hence, the fund manager needs to focus more on the right stock selection.
Who should invest in them?
Investors with a lower risk tolerance looking for investment opportunities in the equity markets usually prefer these schemes. You need to have a long-term investment horizon.
Also, it is suited for investors who are not seeking aggressive returns.
What are the small-cap funds?
Small-cap funds are open-ended equity funds that invest a minimum of 65% of their total assets in small-cap stocks. These are the smaller companies or the new entrants in the market.
These funds have a high potential for growth but also carry a high amount of risk. They are usually recommended for investors with higher risk tolerance
Risk profile:
These funds are the riskiest of the three. Small-cap companies have a low capital base. Despite the risks, these stocks offer great potential for growth
Returns:
Being the highest-risk schemes, they tend to offer an opportunity to earn good returns. The 5-year average has been 14.72%
Roles of funds manager:
Investing in small-cap stocks requires a fund manager with experience in analyzing the small-cap sector. These companies are highly volatile and tend to rise or fall sharply within days.
Hence, the fund manager needs to be in sync with the market at all times.
Who should invest in them?
These schemes are for aggressive investors with higher risk tolerance. Since the small-cap space is highly volatile, these schemes are for investors who can stomach the volatility.
In the long-term, you can expect good returns. You must research the fund manager well before investing in a small-cap fund
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