There are 3 types of funds for market capitalisation:
(A) Large Cap Funds
(B) Mid Cap Funds
(C) Small Cap Funds
Large Cap Funds: These funds invest in top companies ranked from 1 to 100 as per market cap. Large-cap companies have a market cap of Rs 20,000 crore or more. These funds must invest 80% of total assets in large cap companies. They are known to offer consistent returns. The growth potential of large-cap stocks is lower than that of mid and smallcap stocks. For conservative investors who are looking at long term return large cap funds are best suited.
Mid Cap Funds: These funds invest in companies ranked from 101 to 250 as per market cap. Their market cap generally tends to range from Rs. 5,000 to Rs. 20,000 crores. These funds must invest 65% of total assets in mid cap companies. Mid cap funds are risker compared to large cap funds due to more volatility. These companies offer higher growth potential than large cap companies. Hence investors are more inclined in investing in mid cap funds. Mid cap fundsare suitable for investors who have moderate risk tolerance with long term horizon.
Small Cap Funds: These funds invest in companies ranked 251 onwards as per market cap. Their market cap generally is less than Rs. 5000 crores. These funds must invest 65% of total assets in small cap companies. Small cap funds do not have a long track record i.e. newer companies or under developed companies fall under small cap funds. Small cap companies are riskier and more volatile than large cap and mid cap companies. Despite the risk these stocks have greater growth potential. There are suitable for long term investors who have high risk bearing capacity.
Where to invest?
There is no thumb rule to this. Every investor is different and so is the risk bearing capacity and life-goals. Risk and returns go hand in hand. If you want higher returns, you will have to undertake higher risk. Rather than sticking to one category, you can spread out your investments across categories based on your risk tolerance. Mutual fund offers diversifications thus one should use it effectively to their advantage.