The mutual fund sector in India has grown to become the fifth largest economy in the world, and its AUM has reached an incredible Rs 57.26 lakh crore (AMFI, 30 April 2024) and is still growing at an explosive rate. Even with the industry’s rapid expansion, mutual fund investors are still remarkably underrepresented. With 144 crore people living in India, just 4.5 crore people invest in mutual funds, or roughly 3% of the country’s total population (United Nations Population Fund and AMFI, March 2024).
Due to industry-specific language, one of the issues causing the under-penetration is investor ignorance. Furthermore, the abundance of mutual fund varieties on the market may contribute to decision-making uncertainty. We will attempt to deconstruct financial jargon and clarify various funds according to market capitalization in this blog. To begin comprehending these funds, let’s first review market capitalization.
Market capitalization: What is it?
The total value of outstanding shares of stock in a publicly traded corporation is referred to as market capitalization, or market cap. It can be computed by multiplying the price per share by the total number of outstanding shares.
Total outstanding shares multiplied by the share price equals the market capitalization.
The market capitalization gives information on the size and worth of the company. Twice a year, AMFI publishes a list of companies ranked by market capitalization. An organization’s classification as large-cap, mid-cap, or small-cap is based on its market capitalization and the AMFI list.
6 Types of Mutual Funds Based on Market Capitalisation
Mutual Fund with a large cap
An equity mutual fund that invests at least 80% of its assets in large-cap stocks is known as a large-cap fund. Large-cap firms are the top 1st to 100th corporations in terms of complete market capitalization, as per SEBI’s circular of October 6, 2017. These businesses frequently have a long history of consistent performance, are widely known, and are well-established.
Large-cap funds’ stock values are typically less volatile than those of smaller corporations because they invest in well-established, elite companies. Furthermore, returns from large-cap funds are usually reliable and constant. In contrast to funds that invest in smaller, fast-growing businesses, they typically have a lesser growth potential because of the low risk and steady returns.
Mutual Fund for Mid-Capacity
An equity mutual fund that invests at least 65% of its total capital in mid-cap stocks is known as a mid-cap fund. In terms of complete market capitalization, mid-cap companies rank between 101st and 250th, according to a circular issued by SEBI on October 6, 2017. Unlike large-cap corporations, these businesses are typically still in the growth stage and have not yet reached a point of saturation.
Because they have more room to grow, mid-cap companies have a stronger growth potential than large-cap corporations. This suggests that investors’ returns increase in tandem with the value of the underlying securities of a mid-cap fund. Risk is an element that comes with tremendous growth potential. When compared to large-cap corporations, mid-cap enterprises are by nature riskier. But because a mid-cap fund makes investments across a variety of securities, the company-specific risk, or idiosyncratic risk, is diversified. Thus, before making an investment, investors should carefully consider their risk tolerance and financial requirements.
Mutual Fund for small caps
A fund type that invests at least 65% of its capital in small-cap firms is known as a small-cap fund. According to the previously cited SEBI circular, small-cap firms rank 251st through 351 in terms of total market capitalization. These are the new businesses that are just becoming established. These new businesses have the potential for rapid growth since investing in them allows you to seize the early stages of their success story.
Although there is room for tremendous development in small-cap enterprises, there are trade-offs to be aware of. Because they are more vulnerable to economic downturns than large-cap and mid-cap enterprises, small-cap businesses carry a higher amount of risk. Furthermore, higher volatility in small-cap fund returns is a direct result of the volatility in these companies’ stock prices.
Big and mid-sized Mutual Funds
An equity mutual fund that invests at least 35% of its capital in the stock and associated instruments of large-cap firms and 35% of its capital in the stock and similar instruments of mid-cap companies is known as a large-and mid-cap fund.
Because they invest in a variety of large and mid-cap companies, these funds offer the advantage of diversity. These funds also have a low level of risk since they offer the stability of large-cap funds and the growth potential of mid-cap funds.
Mutual Fund with Multiple Caps
A minimum of 75% of the assets in a multi-cap fund are allocated to equities and equity-related products. A September 11, 2020, SEBI circular on the asset allocation of multi-cap funds states that the 75% investment in equities and equity-related securities is divided into the following categories:
a minimum of 25% of the entire amount invested in large-cap firms’ equity and similar securities
25% or more of the entire amount invested in mid-cap firms’ equity and related securities
25% or more of the total amount invested in small-cap firms’ equity and related instruments
Investing in a multi-cap fund exposes investors to a range of companies, which helps reduce risk. Additionally, these funds give investors access to both the stability of large-cap corporations and the development potential of small and mid-cap enterprises.
Mutual Fund with Flexicap
A minimum of 65% of the assets in a flexi-cap fund are allocated to equities and equity-related products. A flexi-cap fund, which was first introduced by SEBI in a circular dated November 6, 2020, is an open-ended dynamic equity program that makes investments in small-, mid-, and large-cap enterprises.
As the name implies, the fund manager in a flexi-cap fund is free to decide how much of his assets are allocated to large, mid, and small-cap companies. In addition, the fund manager has the ability to dynamically modify the portfolio in response to changes in the market. Because the fund manager makes active calls, a Flexi-cap fund may generally be more volatile.
In summary, mutual funds provide a range of products that fall into several categories and have varying degrees of risk. Comprehending the notion of market capitalization and the distinctions among funds falling under this classification can aid you in making well-informed investing choices. It can be difficult to select the best mutual fund for you based on your risk tolerance and financial needs. Furthermore, even though we discussed the many kinds of funds according to market capitalization in this blog, there are still a lot of mutual fund categories, including sector funds, thematic funds, and debt funds, which adds even more complexity. As a result, the investment you choose should be based on your financial situation, risk tolerance, and needs.