6 Types of Mutual Funds Based on Market Capitalisation
As India ascends to the rank of the fifth-largest global economy, the Indian mutual fund industry's AUM has also reached a soaring Rs 57.26 lakh crore (AMFI, 30 April 2024) and is continuing to grow at a scorching pace. Despite this quick growth of the industry, there still remains a striking under-penetration of mutual fund investors. India’s population stands at 144 crore, and the number of mutual fund investors stands at just 4.5 crore, about 3% of the population (United Nations Population Fund and AMFI, March 2024).
One of the factors contributing to the under-penetration is the lack of investor awareness due to industry-specific jargon. Moreover, the plethora of types of mutual funds available in the market can further cause confusion in decision-making. In this blog, we will try to break down the jargon and explain different funds based on market capitalisation. To understand such funds, let’s start with understanding what market capitalisation is.
What is Market Capitalisation?
Market capitalisation (also known as market cap) refers to the total value of a publicly traded company’s outstanding shares of stock. It can be calculated by multiplying the total number of outstanding shares by the price per share.
Market cap = Total number of outstanding shares x price per share
Market capitalisation provides insight into the company’s value and size. AMFI releases a list of companies based on their market capitalisation twice a year. On the basis of market capitalisation and the list released by AMFI, it is determined whether a company is large-cap, mid-cap, or small-cap.
6 Types of Mutual Funds Based on Market Capitalisation
Large-cap Mutual Fund
A large-cap fund is a type of equity mutual fund that has at least 80% of investment in large-cap stocks. According to SEBI’s circular dated October 6, 2017, large-cap companies are the top 1st to 100th companies in terms of full market capitalisation. These companies are often well established and largely recognised, and have a track record of stable performance.
Since large-cap funds invest in top-tier companies that are well-established, their stock prices tend to be less volatile than smaller companies. Moreover, large-cap funds typically deliver consistent and steady returns. However, since the risk is low and returns are stable, they tend to have lower growth potential compared to funds that invest in smaller, high-growth companies. Hence, the choice of investing in a large-cap fund depends on your financial needs, financial position, and risk profile.
Mid-cap Mutual Fund
A mid-cap fund is a type of equity mutual fund that has at least 65% of its investment in mid-cap stocks. According to SEBI’s circular dated October 6, 2017, mid-cap companies are from 101th to 250th companies in terms of full market capitalisation. These companies are generally still in the growth phase and haven’t reached point of saturation such as large-cap companies.
Compared to large-cap companies, mid-cap companies have a higher growth potential because they have more room to grow. This implies that as the value of a mid-cap fund's underlying securities rises, so do investors' returns. With high growth potential, comes the factor of risk. Mid-cap companies are inherently riskier as compared to large-cap companies. However, since a mid-cap fund invests in a basket of securities, the idiosyncratic risk, i.e. the company-specific risk, gets diversified. Hence, investors should carefully analyse their risk profile and financial needs before investing.
Small-cap Mutual Fund
A small-cap fund is a type of fund with at least 65% of its investment in small-cap companies. As per the aforementioned SEBI circular, small-cap companies are 251st company onwards in terms of full market capitalisation. These are the young companies that are just starting to make their mark. When you invest in such emerging companies, you have the chance to capture the early stages of their growth story, which means these companies have the potential for explosive growth.
While small-cap companies have the potential for significant growth, It's important to remember that it comes with a trade-off. Small-cap companies have a greater level of risk as compared to large-cap and mid-cap companies, since they are more susceptible to economic downturns. Moreover, the volatility in the stock prices of such companies, means higher volatility in small-cap fund returns.
Large & mid-cap Mutual Fund
A large & mid-cap fund is an equity mutual fund with at least 35% of its investment in equity and related instruments of large-cap companies and 35% of its investment in equity and related instruments of mid-cap companies.
Such funds provide the benefit of diversification since they invest in a mix of large & mid-cap companies. Moreover, such funds provide the growth potential of a mid-cap fund and stability of large-cap funds, hence, having a moderate level of risk.
Multi-cap Mutual Fund
A multi-cap fund invests at least 75% of its portfolio into equity and equity-related instruments. According to a SEBI circular on asset allocation of multi-cap funds dated September 11, 2020, the 75% investment in equity and equity-related instruments can be broken down into -
- At least 25% of total investment in equity and related instruments of large-cap companies
- At least 25% of total investment in equity and related instruments of mid-cap companies
- At least 25% of total investment in equity and related instruments of small-cap companies
A Multi-cap fund provides investors with exposure to a variety of companies, which can help mitigate risk. Moreover, these funds provide investors with the growth potential of small and mid-cap companies along with the stability of large-cap companies.
Flexi-cap Mutual Fund
A flexi-cap fund invests at least 65% of its portfolio into equity and equity-related instruments. Introduced by SEBI in a circular dated 6 November 2020, a flexi-cap fund is an open-ended dynamic equity scheme investing across large-cap, mid-cap, and small-cap companies.
As the name suggests, in a flexi-cap fund, the fund manager has the freedom to choose his asset allocation into large, mid, and small-cap companies. The fund manager can also dynamically adjust the portfolio based on their assessment of the market condition. A Flexi-cap fund could typically have a higher volatility due to the fund manager’s active calls.
To conclude, mutual funds offer a spectrum of products that lie in different categories and have varied levels of risk. Understanding the concept of market capitalisation and the difference between funds lying in this category, can further help you make informed investment decisions. Choosing the right mutual fund for you based on your financial needs and risk profile can be confusing. Moreover, while we talked about different types of funds based on market capitalisation in this blog, there still lies a plethora of mutual fund categories, such as sector funds, thematic funds, and debt funds, bringing in a higher degree of confusion. Hence, the choice of investment should depend on your financial needs, risk profile and your financial position. To do this, you can opt for the guidance of a mutual fund distributor. A mutual fund distributor can understand your unique needs and risk profile and provide you with tailored guidance to ride the waves of market volatility.