How Mutual Funds are Divided?
There are various types of mutual fund schemes available, such as equity, debt, and hybrid funds. However, for most investors, equity mutual funds are preferred for higher returns. Within the equity mutual fund category, funds are further divided into large-cap, mid-cap, and small-cap funds. These funds are categorized based on the companies’ market capitalization (market cap). Market capitalization refers to the total market value of a company’s outstanding shares of stock, calculated by multiplying the company’s share price by its total number of shares.
- Equity Mutual Funds are divided by the company’s market capitalization.
- Mid-cap Funds provides stable returns with moderate risk.
- Small-cap Funds provides higher return with higher risk involved.
Mid-cap Vs Small-cap Funds Overview
What exactly are mid-cap and small-cap funds? Mid-cap funds invest in companies with a medium-sized market cap, while small-cap funds target smaller, emerging companies with lower market caps. Understanding these categories can help you determine which type of fund is best suited for your investment goals and risk tolerance.
What are Mid-cap Funds
According to SEBI, mid-cap companies are those ranked between 101st and 250th in terms of market capitalization. These companies typically have a market cap ranging from Rs 5,000 crore to Rs 20,000 crore and are included in mid-cap funds.
In these funds, the companies included are in the growth phase and are more stable than small-cap companies. While these companies may provide lower returns compared to small-cap, they also come with less risk.
What are Small-cap Funds
Small-cap companies are those ranked below the 250th position in terms of market capitalization, with a market cap of less than Rs 5,000 crore. These companies are typically included in small-cap funds.
These funds include companies that are generally smaller and emerging, in the early stages of growth and development. While these companies have the potential for high returns, they are also highly volatile and carry a higher risk of losses.
Difference Between Mid-cap Funds and Small-cap Funds
| Companies involved in funds | |
|---|---|
| Mid-cap Funds |
Typically, these companies have a market capitalization ranging from ₹5,000 crore to ₹20,000 crore and are ranked between 101st and 250th by market capitalization. |
| Small-cap Funds |
n these funds, the companies involved typically have a market capitalization of less than ₹5,000 crore and are ranked below 250th by market capitalization. |
| Profit Potential | |
|---|---|
| Mid-cap Funds |
Offer moderate returns compared to small-cap funds. |
| Small-cap Funds |
Have the potential for higher returns. |
| Risk associated | |
|---|---|
| Mid-cap Funds |
Mid-cap funds are suitable for those who are moderate risk takers |
| Small-cap Funds |
However, with higher returns potential, small-cap funds comes with higher risk as well. |
| Volatility | |
|---|---|
| Mid-cap Funds |
Mid-cap funds might be more volatile than large-cap funds but less volatile than small-cap funds |
| Small-cap Funds |
Small-cap funds are the most volatile in nature since their market cap is low. |
Mid-cap Vs Small-cap Funds Real Life Example with Returns
When comparing the performance of mid-cap and small-cap funds, it’s essential to analyze historical data while keeping in mind that returns are subject to market fluctuations. In 2024, the average return of all small-cap funds—such as those offered by Quant, HDFC, Nippon, SBI, and Kotak—was 25%, while mid-cap funds from similar providers delivered a higher average return of 30%. This shows that small-cap funds don’t always deliver higher returns, and their performance can vary significantly depending on market conditions.
Comparison of Mid-cap and Small-cap Fund Returns
| Mid-cap Funds Returns | Duration | Small-cap Funds Returns |
|---|---|---|
| 30% | CY 2024 Returns | 25% |
| 23% | 3 Years Average Annual Return | 22% |
| 28% | 5 Years Average Annual Return | 32% |
Over the last three years, the average annual return for small-cap funds was 22%, while mid-cap funds offered 23%. However, when we extend the horizon to five years, small-cap funds provided an average annual return of 32%, slightly outperforming the 28% annual average return of mid-cap funds. These averages are based on data from Moneycontrol, calculated across multiple fund houses.
It’s important to note that these returns are based on past performance and do not guarantee future results. Not every fund performs as expected—some may significantly outperform the average, while others may fail to meet expectations. Investors should treat this data as a guideline rather than a predictor of future outcomes.
Which one to choose? Mid-cap or Small-cap Fund?
While choosing a particular fund depends entirely on an individual’s financial goals, risk tolerance, and investment horizon, it’s essential to understand the risks associated with each type of fund. Generally, higher returns comes with higher risk. Small-cap funds, for example, have the potential to generate impressive returns but are also more volatile. On the other hand, mid-cap funds offer a balanced mix of growth and stability, making them an attractive option for those who seek moderate risk with potentially higher returns than large-cap funds.
Before deciding, investors should assess their goals, are they investing for short-term or long-term? it is also crucial to understand if the investor is willing to take the risk and ready to bear the market fluctuation or they prefer more steady returns. Diversifying investments across both mid-cap and small-cap funds could also be a strategy to balance risk and return. Ultimately, consulting a financial advisor can help tailor the right investment strategy according to personal objectives and market conditions.
FAQs
- Q. Why is market cap important for investors?
Ans. Market cap is important because it provides an indication of the size, stability, and growth potential of a company.
- Q. Can small-cap funds provide better returns than mid-cap funds?
Ans. Small-cap funds may outperform mid-cap funds, but their performance is not always the same.
- Q. Do past returns guarantee future performance?
Ans. No, investors cannot rely on past returns. Both small-cap and mid-cap funds are subject to market fluctuations.
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