Investing in the stock market can be both exciting and overwhelming. One key aspect to grasp is the classification of stocks by market capitalisation: Large-cap, mid-cap, and small-cap. These categories are critical for diversifying your portfolio and aligning investments with your financial goals.
What is market capitalisation?
Market capitalisation, often referred to as market cap, represents the total value of a company’s outstanding shares in the market. It is determined by multiplying the current share price by the total number of shares in circulation.
Based on their market cap, the Association of Mutual Funds in India (AMFI) classifies companies into three categories: large-cap, mid-cap, and small-cap.
- Large-cap companies: The top 100 companies in terms of full market cap.
- Mid-cap companies: Companies ranked 101st to 250th in terms of full market cap.
- Small-cap companies: Companies ranked 251st and beyond in terms of full market cap.
What are large, mid, and small-cap stocks?
Large-cap
- Companies ranked among the top 100 by market capitalisation
- Typically well-established with consistent performance
- Include blue-chip companies
- Known for stability and steady returns
Mid-cap
- Companies ranked between 101 and 250 by market capitalisation
- Represent growing businesses with significant potential
- Higher growth potential than large caps
Small-cap
- Companies ranked beyond 250 in terms of market capitalisation
- Emerging businesses with niche focus or new ideas
- Riskier than mid-cap stocks but have the potential to deliver substantial returns
Differences between large, mid, and small-cap funds
Company type and stature
- Large-cap funds invest in established, well-known companies with proven business models.
- Mid-cap funds focus on growing companies and expanding their market reach.
- Small-cap funds target emerging companies still proving their potential.
Volatility
- Large-cap funds are less volatile and offer stable returns.
- Mid-cap funds have moderate volatility.
- Small-cap funds are highly volatile, reflecting higher risk and return potential.
Growth potential
- Large-caps grow steadily but may not match the high potential of mid-sized and smaller companies.
- Mid-caps offer a balance between growth and stability.
- Small-caps carry high growth potential but come with elevated risks.
Liquidity
- Large-caps are highly liquid, making it easy to buy or sell shares without affecting the price.
- Mid-caps and small-caps have relatively low liquidity especially during market downturns.
How to diversify your portfolio with large-cap, mid-cap, and small-cap stocks
1. Identify your risk appetite: Investors with a low-risk tolerance might lean towards large caps, while those seeking higher returns can allocate more to mid and small-caps.
2. Allocate wisely: Build a diversified portfolio that aligns with your risk appetite—large caps for stability, mid-caps for growth, and small-caps for higher risk-reward potential.
3. Review regularly: Adjust your portfolio periodically to align with your goals and market trends.
Popular indices for tracking large-cap, mid-cap, and small-cap stocks
- Large-cap: Nifty 50, Nifty 100, S&P BSE Sensex, S&P BSE 100
- Mid-cap: Nifty Midcap 50, Nifty Midcap 100, S&P BSE Midcap, Nifty Midcap 150
- Small-cap: Nifty Smallcap 50, Nifty Smallcap 100, Nifty Smallcap 250, S&P BSE Smallcap
Also Read: How to invest in Mutual Funds?
Conclusion
Knowing what is large-cap, mid-cap and small-cap is crucial for making sound investment decisions. Each category has unique characteristics, benefits, and risks. By understanding these differences and aligning your investments with your financial goals, you can create a well-balanced and rewarding portfolio. Mutual funds offer a convenient way to invest across these segments, providing built-in diversification, professional management, and affordability.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.
