Do you have doubts about where and how to invest your money that you worked hard for? Have you recently begun your investment journey? Imagine getting a solution to all your queries in one place.
That’s right, investing may seem a little intimidating, but this blog post will nurture you and will help you get a solid understanding of market terms so that you can kickstart your investment journey with ease.
When you begin to explore mutual funds and the market, you might encounter terms such as market capitalisation, large cap, mid cap, small cap, and more.
Understanding these will help you determine what investment strategy you should adopt to align with your risk profile and invest in the best mutual fund accordingly.
So sit back and get ready to discover your perfect blueprint.
Why do you need a Proper Strategy?
Investing your money is like planning a birthday party. Without a proper plan, you might end up in a boring, mediocre place or with unsatisfactory arrangements. Your plan has to align with your preferences for risk-taking and objectives.
With a plan, you can avoid being swept away by the opinions of others, which can confuse you to choose from various categories like large-cap, mid-cap and so on.
Hence, to create a plan, let us begin with an understanding of the basics of market Capitalisation.
What is Market Capitalisation?
Market capitalisation is a method to evaluate the worth of a company. It is the most recent value of the company’s outstanding shares.
SEBI ( Securities Exchange Board of India) ranks and categorizes companies according to their market capitalization.
The total Market capitalisation of the company can be calculated as follows:
Market capitalisation = Number of Outstanding Shares x Current Market Price of each share
Companies based on market capitalisation can be categorized into 3 types:
- Large-cap companies
- Mid-cap companies
- Small-cap companies
The major types of funds in which investors majorly go on to invest are further elaborated below.
Large-cap Mutual Funds
According to SEBI’s classification system, companies in the stock market are categorized as Large-cap if they are among the top 100 based on market capitalization.
The mutual funds invested among these 100 companies’ stock are referred to as ‘large-cap mutual funds’.
Large-cap funds are generally recommended for an investment horizon of 7+ years. If you stay invested during this tenure you will get an approximate return up to 12% which is based on previous data, future returns may vary according to the market conditions.
However, it’s important to remember that big companies with lower risk provide lower returns because their stock prices are less likely to see significant changes.
Mid-cap Mutual Funds
As per the regulation issued by SEBI in the year 2017 Mid-cap companies are those companies which are ranked 101-250 based on market capitalization.
The mutual funds invested in these companies’ stock are referred to as ‘Mid-cap mutual funds’.
The recommended investment horizon for mid-cap mutual funds is 8+ years. If you stay invested during this tenure you will get an approximate return of up to 14% which is based on previous data, future returns may vary according to the market conditions.
Over the long run, mid-cap funds have the potential to yield high investment returns. Hence, investors seeking greater potential returns than Large-cap funds but are willing to take on slightly more risks may opt for Mid-cap funds.
Small-cap Mutual Funds
Companies ranked from the 251st rank based on market capitalisation under SEBI guidelines are called small-cap companies. These companies are a lot in number and comparatively smaller in composition and size than Large-cap or Mid-cap.
The mutual funds invested in these companies’ stock are referred to as ‘Small-cap mutual funds’.
Small-cap mutual funds have a long-term investment horizon of 10+ years and are recommended only if you can invest your money without withdrawing for such a long time. If you stay invested during this tenure you will get an approximate return of up to 16% which is based on previous data, future returns may vary according to the market conditions.
Smaller enterprises are volatile and more vulnerable to market shifts than large and mid-cap companies, which also raises the possibility of significant financial setbacks.
Difference between Large-cap, Mid-cap & Small-cap funds
Returns Comes in Blocks
Once you decide to invest in Large-cap, Mid-cap or Small-cap funds you don’t receive the returns in whole. Instead, you receive them in blocks. The total investment horizon of mutual fund is divided into blocks where each block has their respective rate of returns. All these rates when summed up come to an average rate at which they finally get the return if the withdrawal is done after the completion of the investment horizon.
Let’s understand this with the help of an example
If you started investing in a large-cap fund the ideal investment horizon for it is 7 years.
In the first year, you receive a return of – 34%
In the second year, the return received was of -15%.
In the third year, the return was – 4%
Till the third year you were receiving negative returns in blocks. But then in the fourth year, you got a return of 3%.
Then in the fifth year a return of 13%.
In the sixth year, the return was 17% and in the seventh and the last year of the investment horizon, the return was 32%.
These investments were also received in individual blocks. Ultimately the total of the whole investment horizon turns out to be 12% and you will get a return on this rate itself.
Where to invest — Large, Mid or Small-Cap Funds?
There is no specified answer to where a person should invest when he is just starting his investing journey. The investment strategy entirely depends upon a person’s risk-taking abilities.
If you’re someone who requires a stable income with few risks involved then Large-cap funds are the option for you.
If you’re someone who can take moderate risks and want to earn comparatively more than what large-cap has to offer then Mid-cap funds should be your choice.
Lastly, if you’re someone who is not scared to take risks and wants to earn the maximum amount of profits out of fund then Small-cap funds should be the right choice for you.
Although it is advisable to not just put all your money into one type of fund, instead diversify your portfolio so as to get stable returns overall or invest as per your financial goals.
Bottom Line
If you’ve come this far, I hope that different types of funds, i.e., Large, Mid and Small-cap funds and their diversifications are clear to you. Investing allows you to explore options as per your preference and with these choices you can maximise your returns to your advantage.
However, I would advise you to broaden your portfolio and not put “all your eggs in one basket”.This means that do not just invest in one type of fund. Instead, prioritise based on your risk profile and segregate your money to be invested accordingly.
Please share your thoughts on this post by leaving a reply in the comments section. And don’t forget to, check out our recent post on “Why Sip Could Be a Game Changer for Investors!“.
To learn more about mutual funds, contact us via Phone, WhatsApp, Email, or visit our Website.
Additionally, you can download the Prodigy Pro app to start investing today!
Disclaimer – This article is for educational purposes only and by no means intends to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.
