What is market capitalization?
Market Capitalization of any company can be defined as the market value of all outstanding shares of that specific company. By multiplying the outstanding shares of the company with the market price of each share we can get the value. The companies use market capitalization to show the size of a company. It is important because company size is a basic element of various characteristics in which investors are interested, including risk. It is easy to calculate.we will discuss the Large-cap, Mid-cap, and Small-cap in this article in detail.
Market Capitalization= Current Stock Price x Number of outstanding shares
What is Large-cap, Small-cap, and Mid-cap?
- Small-cap is a term used to distinguish companies with relatively small market capitalization. A company’s market capitalization is the market value of its outstanding shares. In India, normally a company below market capitalization of Rs.5000 crores is classified as a small-cap company.
- Mid-cap company is a company with a market capitalization above Rs.5000 crores and less than Rs.20000 crores are viewed as a midcap company.
- Large-cap refers to a company with a market capitalization value of more than Rs.20,000 crores is recognized as Large-cap companies. Large-cap is a reduced version of the term large market capitalization.
Difference between Large Cap, Mid-cap, small-cap
|Large-caps Shares||Mid Caps Shares||Small Caps Shares|
|Large-cap are big, well-established companies in the equity market. These companies are strong, reputable and trustworthy. Large-cap companies generally are the top 100 companies in a market. There is no consensus on the capitalization as such.||Mid-cap are compact companies of the equity market, falling somewhere between small and large-cap companies and are 100-250 companies in a market after large-cap companies.||Small-cap are small companies in the stock market and are all the companies apart from large and mid-cap companies in a market.|
|Stocks of large-cap companies are the least risky investment instruments.||Stocks of mid-cap companies are the riskier than large-cap but not as risky investment instrument as small-cap||Stocks of small-cap companies highly risky and volatile investment instruments.|
|Large-cap funds have lower growth potential and give investors lower returns on investment as compared to mid and small-cap funds. But provide good stability in returns on investment, if invested for a longer duration.||Mid-cap funds have better growth potential and give investors higher returns on investment as compared to large-cap funds||Small-cap funds have exponential growth potential and give investors high returns on investment|
|Investment in large-cap is best suited for investors with low-risk appetite and for the investment of lumpsum amount.||Investment in mid-cap companies is best suited for investors with moderate risk appetite and is most popular among investors.||Investment in small-cap is best suited for investors with high-risk appetite and have good knowledge of the stock market.|
|The liquidity of shares of large-cap is very high because they are reputed, mature and firmly established players in the market.||The liquidity of shares of mid-cap companies is more as compared to small-cap funds.||The liquidity of shares of small-cap companies is least.|
|They are highly followed in the stock market and usually tapped by institutional investors.||Highly followed in the stock market and usually tapped by institutional investors.||They are under followed in the stock market and usually untapped by institutional investors, giving a huge opportunity to wise investors to grow their investment quickly.|
Key Differences of Large Cap, Mid-cap, small-cap
In terms of risk-
Large Cap funds
Large Caps funds have a large amount of market capitalization. Securities and Exchange Board of India (SEBI) provides the definition of large-caps as the largest 100 companies in terms of market capitalization. Generally, this means NIFTY 50 and NIFTY Next 50 companies listed on the exchange. Best examples of large-capital stocks in India are Reliance Industries, Tata Consultancy Services, Maruti Suzuki, Infosys, etc.
Mid Caps funds
As per the identity provided by SEBI, mid-caps comprise of companies ranging from 101 to 250 in terms of market capitalization.Mid-capital funds are considered riskier than large caps, but provides higher returns and are therefore becoming one of the most sought after investments for the retail investors. Stocks such as Biocon, Tata Global Beverages, AIA Engineering, Federal Bank are well known in the mid-cap space.
Small Caps funds
According to SEBI, all companies from the 251st company in terms of market capitalization can be considered as small-capital stocks. Small-capital stocks are considered to be the riskiest for investments. Because of the low capital base. However, small caps are considered to be the most profitable option. In terms of investment given their remarkable potential in generating returns. Examples of small-caps stocks are HEG, Persistent Systems, India Cements, VIP Industries, etc. Investors should also keep in mind that all mid-capital and large-capital stocks were also once small caps and became large by way of expansion and growth. There are primarily two risks associated with small-capital stocks that make them potentially riskier than large-capital stocks.
- Small caps stocks are less liquid when it comes to trading which means investors might have difficulty in buying shares in bulk or sell shares at favorable prices as per their wish;
- The risk for small-capital and mid-capital companies is accentuated because they are likely to have less access to capital as compared to large caps (which can be used for funding new businesses or projects).
In terms of returns-
In the table below, we get a glance and analyze returns generated by top large, mid and small capital mutual funds
Large Cap Mutual Funds
|Name of the Fund||1 Year||3 Year||5 Year||Risk Level|
|SBI Bluechip Fund||2.7%||12.1%||19.3%||Moderately High|
|Quantum Long Term Equity Fund||6.0%||14.25%||17.1%||Moderately High|
|Reliance Large Cap Fund||9.4%||14.2%||21.1%||Moderately High|
|Motilal Oswal Most Focussed 25 Fund||2.0%||11.8%||18.9%||Moderately High|
|Aditya Birla Sun Life Frontline Equity Group||2.5%||12.2%||18.1%||Moderately High|
Mid-Cap Mutual Funds
|Name of the Fund||1 Year||3 Year||5 Year||Risk Level|
|IDFC Sterling Value Fund||-1.6%||15.7%||23.2%||Moderately High|
|Mirae Asset Emerging bluechip Fund||2.7%||19.0%||33%||Moderately High|
|L&T Mid Caps fund||-2.5%||16.7%||30.1%||Moderately High|
|Kotak Emerging Equity Fund||-0.8%||14.5%||30.0%||Moderately High|
|Canara Robeco Emerging Equity Fund||2.7%||16.9%||33.5%||Moderately High|
The data shown in the above tables, correctly depicts that higher the risk is undertaken by an individual investor, greater would be his/her profits. The average five-year returns for the funds stated above is as follows
Large Caps – 18.9% Mid-Caps – 29.96% Small Caps – 31.7%
In terms of the expense ratio and top holdings-
The expense ratio is the amount the company charges to manage one’s investment portfolio.
If someone invests 10,000 in a particular fund that has an expense ratio of 2%, then it means that he/she needs to pay INR 200 as part of the expense for running the fund.
Simply put, if a fund earns returns of only 20% in a particular year and has an expense ratio of 2%, then one would earn a return equal to 18%.
The Net Asset Value (NAV) of a particular fund is reported after deducting all fees and expenses and hence looking at the expense ratio for a fund becomes critical.
To differentiate between the expense ratio for each fund based on category (i.e. large-capital, mid-capital, and small-capital), we can use the different funds offered by a particular fund house in each category.
The table highlighted below helps us gauge details in a better way:
RELIANCE MUTUAL FUND
|TYPES OF FUND||EXPENSE RATIO|
|Reliance Large Cap Fund(Large Cap)||1.28%|
|Reliance Growth Fund(Mid Cap)||1.51%|
|Reliance Small Cap Fund(Small Cap)||1.22%|
|TYPES OF FUND||EXPENSE RATIO|
|L&T India Large Cap Fund(Large Caps)||2.01%|
|L&T Midcap Fund(Mid Caps)||1.49%|
|L&T Emerging Business Fund(Small Caps)||1.57%|
KOTAK MUTUAL FUND
|TYPES OF FUND||EXPENSE RATIO|
|Kotak Bluechip Fund(Large Cap)||1.15%%|
|Kotak Emerging Equity Fund(Mid Cap)||1.26%|
|Kotak Small Cap Fund(Small Cap)||1.40%|
To know more about Kotak Mutual Funds
However, Securities and Exchange Board of India (SEBI) came out with a circular recently wherein it highlighted the Total Expense Ratio (TER) to be followed basis the fund size as highlighted below:
|AUM(in crores)||TER for equity-oriented schemes||TER for other schemes (Excluding Index funds, Exchange-traded funds and Fund of Funds)|
|10000-50000||TER reduction of 0.05% for every increase of 5000 crores AUM or part thereof||TER reduction of 0.05% for every increase of 5000 crores AUM or part thereof|
In terms of top holdings, the top mutual funds as highlighted above have the following in common:-
Large Caps Funds
|Name of the Fund||Top Holding|
|SBI Bluechip Fund||HDFC Bank Ltd, L&T, M&M, ITC Ltd., Nestle India|
|Quantum Long Term Equity Fund||Infosys Ltd, HDFC Ltd, Bajaj Auto, Hero MotoCorp Ltd, TCS|
|Reliance Large Cap Fund||SBI, ITC Ltd, HDFC Bank Ltd, L&T Ltd, Infosys Ltd|
|Motilal Oswal Most Focussed 25 fund||HDFC Bank Ltd, L&T, M&M, ITC Ltd., Nestle India|
|Aditya Birla Sun Life Frontline Equity Fund||HDFC Bank Ltd, Infosys Ltd, ICICI Bank Ltd, ITC Ltd, L&T Ltd|
Based on the above charts we can analyze and see that HDFC Bank Ltd, HDFC Ltd, Infosys, TCS, and ITC Ltd are hot stocks in the large-capital space that most mutual fund houses invest in.
|Name of the Fund||Top Holdings|
|IDFC Sterling Value Fund||Future Retail, RBL Bank Ltd, Bajaj Finance Ltd, Minda Industries Ltd, Ramco Cements|
|Mirae Asset Emerging Bluechip Fund||HDFC Bank Ltd, Kotak Mahindra Bank, ICICI Bank Ltd, Reliance Industries Ltd, Havells India Ltd|
|L&T Midcap fund||Bharat Financial Inclusion, Emami Ltd, Berger Paints, Ramco Cements Ltd, City Union Bank Ltd|
|Kotak Emerging Equity Fund||Bharat Financial Inclusion, Schaeffler India Ltd, RBL Bank Ltd, Atul Ltd, Ramco Cements Ltd|
|Canara Robeco Emerging Equity Fund||Bajaj Finserv, Reliance Industries, ITC Ltd, Britannia Industries Ltd, Atul Ltd|
If we were to look at the favorite stocks in the mid-capital space, the top picks in this space by various fund houses have been RBL Bank Ltd, Ramco Cements, Atul Ltd, Bharat Financial Inclusion Ltd.
|Name of the fund||Top holdings|
|L&T Emerging Business Fund||HEG Ltd, Lakshmi Machine Works, Ramco Cements, Future Retail Ltd, CARE Ratings|
|HDFC Small caps fund||NIIT Technologies, Aurobindo Pharma, First Source Solutions Ltd, Sharda Cropchem Ltd, SKF India Ltd.|
|Reliance Small caps fund||Zydus Wellness, VIP Industries, Cyient Ltd, Deepak Nitrite Ltd, Navin Fluorine International Ltd|
|Sundaram Small Caps Fund||Rane Holdings Ltd, Navin Fluorine International, V-Guard Industries, J K Cement Ltd|
|IDBI small-cap fund||General Insurance Corporation of India Ltd, 3M India Ltd, NRB Bearings Ltd, Camlin Fine Sciences Ltd, KEI Industries Ltd|
Based on our analysis, we find that the top picks in this space are HEG Ltd, Navin Fluorine International Ltd, V-Guard Industries, etc.
In terms of investment approach-
As large capital funds invest primarily in companies having a greater market capitalization, they are less prone to risk as compared to mid and small caps.
The investment approach can be found out by looking at examples of specific funds.
Such as Reliance Large Capital Fund which invests primarily in companies whose market capitalization is within the range of the highest & lowest market capitalization of BSE- SENSEX 200 Index (The fund chooses the stocks based on strong fundamentals and in tune with the main objective to generate long term capital appreciation).
Other examples could be that of Motilal Oswal Mutual Fund (which follows the methodology of QGLP; i.e Quality, Growth, Longevity and Price across all its funds and differentiates only in picking companies as per the type of fund, i.e choosing companies having smaller market capitalization for small capital funds and is able to generate long term capital appreciation.
Understanding all the differentiation on basic of risk involved, amount of returns, funds holding capacity and much more. One can easily choose which type of investment you are interested in. Our website have various kinds of investment plans and funds.
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Frequently Asked Questions
Mid- Cap funds: Here, the mutual fund invests in stocks of mid-size companies. These funds provide a moderate risk to investors.
Small-Cap funds: In these types of funds, the fund manager invests a major portion of the investors’ money in stocks of companies having low market capitalization.