As you know, Market capitalization for a company, which is most commonly referred to as market cap, is equal to the current share price multiplied by the number of shares outstanding of the company.
In the stock market, not every company has the same market capitalisation. Some companies like Reliance or Tata Consultancy Services or State Bank of India have very high market capitalization while a relatively newly listed company might have a smaller market cap.
Types of companies according to market cap: Listed companies are categorized into various groups, considering their market capitalisation. That’s why in the stock market, SEBI – the governing body has made a rule to categories companies according to their market capitalisation. These are: 1. Large Cap 2. Mid Cap 3. Small Cap.
No.1: SEBI’s definition of Large, Mid and Small Cap companies
- The top 100 companies listed on the stock market are the Large Cap.
- Companies that ranks between 101 – 250 according to their market cap are called Mid Cap.
- Companies that rank after 250 in the market are called Small Cap.
No. 2: Relation of companies and Mutual Funds
Mutual funds are classified into various categories according to the market cap of the companies that they have invested in.
- A large cap Mutual Fund has to mandatorily invest at least 80% of its money in large cap securities.
- A Mid Cap Mutual Fund must invest at least 65% of its wealth in mid cap companies.
- A small cap mutual fund must invest no less than 65% of its assets in small cap stocks.
So one thing that is clear from the above data is that – if it is a large cap mutual fund it may not invest all its wealth in large cap companies – fund managers are expected to adhere to prescribed limits. Same thing applies for mid and small caps.
No.3: Benefits of investing in Large Cap Fund
In the market, the Large Cap Mutual Funds are the preferred active Mutual Funds as they invest in the most well-known companies. Their long track record, corporate governance, reputation and financial strength of the stocks makes them more trustworthy.
Hence, large cap mutual funds are generally considered good for investors who believe in steady wealth creation.
No. 4: Disadvantages of investing in Large Cap Funds
Mid cap and Small cap Equity mutual funds can provide a better return compared to Large cap, owing to their growth potential. On the contrary, when markets correct, these mutual funds tend to disappoint, when their fall is higher than the large cap mutual funds or the benchmark.
No. 5: Market cap Flexibility
Multi-cap mutual funds invest across small cap, mid and large cap stocks but with an equal measure of 25% each, leaving 25% flexibility with the fund manager. Flexi-cap funds on the other hand, can invest in any stock irrespective of the company’s market cap without being constrained by a given proportion.
When markets are growing, both these funds tend to make higher return by increased mid-and small-cap allocations, and the ability to shift across market caps.
We hope you have learnt something new today about the market cap and how mutual funds strategy is influenced by it. It is our constant endeavour at Motilal Oswal to educate and make an ‘investor’ a ‘sound investor’! Happy Investing!