Small Cap vs. Large Cap Funds: Which One Should You Choose?

Small-cap, mid-cap, and large-cap mutual funds are classified depending on the rate and nature of market capitalisation of the respective companies they are investing. You can decide your investments based on your income status, financial goals, and risk appetite.

What are small-cap funds?

Small-cap funds are invested in the market by companies which maintain a market capitalisation of below INR 5000 Cr. These funds allocate their investments to companies ranking 251 onwards. Quant small-cap fund deserves a special mention in this respect. Because of their small size, they are comparatively more agile ensuring swift implementation of ideas and easy capitalisation of associated market opportunities. For, these qualities, these funds generate comparatively higher returns, although with the association of a higher risk.

What are large-cap funds?

These funds are maintained by companies with a market capitalisation of at least INR 20000 Cr. They usually rank between 1 and 100 in terms of market capitalisation. Well-established and successful companies like ITC, SBI, etc. belong to this category. These companies maintain a remarkable record of accomplishments and possess noteworthy market credibility.

CATEGORY	MARKET CAPITALISATION RANKING	RISKOMETER	GROWTH POTENTIAL
SMALL-CAP FUNDS	251 onwards	High	High
LARGE-CAP FUNDS	1-100	High	Low

How do you choose between large-cap and small-cap funds?

Before finalising any investment, you must critically analyse your financial targets and risk appetite. If you are seeking stable and guaranteed returns with a relatively low volatility then large-cap funds prove to be your perfect rescue. You might consider investing in a Quant small-cap fund.

However, if you desire comparatively higher returns and maintain a high-risk tolerance, then you can opt for small fund investments. These are dealt with by well-established large companies like Reliance, ITC, Birla, etc.

Who should invest in small-cap and large-cap funds?

When considering mutual fund investments, you must critically assess your risk tolerance along with your current income status, responsibilities, and future financial targets. Considering all these factors, we can say, that large-cap funds are a perfect suit for relatively conservative investors who seek long-term guaranteed returns and despise aggressive returns. On the other hand, small-cap funds are customised for risk-loving short-term investors. However, this requires thorough research and beneficial financial status as the risk levels are much higher in this respect.

Diversifying financial portfolio

Ideally, as a wise investor, you must maintain a diversified financial portfolio, including both large and small-cap funds and incorporate some mid-cap funds too. The percentage of your investment in these sectors depends on your risk tolerance and financial goals. Some of the essential tips to ensure portfolio diversification include:

1. Risk tolerance assessment:

Before initiating your investment, you must critically assess the level of your risk tolerance capacity. If you seek stability and security, then go for large-cap investments. If you prefer aggressive returns, then small-cap is your line.

2. Quality:

If you are opting for large-cap investments, then always choose blue-chip companies with a commendable track record. In the case of small-cap funds, companies with significant fundamentals and noticeable growth potential are ideal.

3. Mutual fund investments:

Choosing individual funds may seem overwhelming. You might go for investing through mutual funds that ensure professional management and wise diversification.

4. Allocation levels:

Depending on your risk tolerance, a balanced financial portfolio might incorporate 50% large-cap, 30% mid-cap, and 20% small-cap funds. However, you can always revise this combination according to your requirements.

Interesting considerable factors

While seeking small-cap or large-cap investments, you must consider certain typical factors like your investment horizon, financial targets and responsibilities, and risk appetite. Comparatively young investors may choose mid and small-cap investment opportunities, allowing relatively aggressive returns. Those who are nearing their retirement might seek stability and security through large-cap investments. The factors that you need to consider in this respect include:

1. Balancing rewards and risks: You must note that large caps allow stability and small caps allow aggressive growth opportunities.

2. Strategic allocation: You must wisely diversify your investments depending on your financial targets and risk tolerance.

3. Quality: Always ensure to choose blue chip funds to ensure security.

4. Leverage: Try to opt for professionally managed funds for easy and secured diversification across various market capitalisation options.

5. Review: Ensure to rebalance and monitor your funds at regular intervals and make the necessary alterations depending on the market changes.

Conclusion

If you understand the spectrum of large, mid, and small-cap funds, you make an informed decision to ensure optimum financial growth and returns. Large-cap funds prioritise established companies with prominent market presence while the small-caps deal with growing companies.