If you have happened to come across any mutual fund advertisement, then you would come up with terms like large cap, small cap, mid cap funds and so more. For those who are naïve at mutual funds and its basic terminologies, these terms could be straight out of Oxford Dictionary.
In the context of mutual funds investment, the term “cap” refers to the market capitalization along with the size of the listed company. The size of the company is an important factor while selecting a particular mutual fund to make the investment. This helps in the decision-making with respect to selecting stocks for equity portfolios. This is because making an investment in a company of a particular size brings out the unique opportunities and risks.
For your better analysis of the different mutual funds, here is an overview of the same depending on the “cap” factor:
- Large cap Funds: These are those types of mutual funds which tend to invest a bigger proportion of the corpus in various companies with greater market capitalization. A large cap company is usually characterized by parameters like trustable, strong and reputable factors. The large cap companies usually tend to be old along with being well-established in terms of a higher track record. These companies mostly have strong practices of corporate governance. Thus, they have managed to generate wealth for the investors in a slow and steady manner over the period of long term.
The large cap corporate houses are generally among the highly followed as well as well-researched components of the market. The mutual funds that tend to invest a majority of the investible corpus in the large cap companies are referred to as the “large cap mutual funds”.
As the large cap mutual funds tend to be seasonal players, the fundamental companies in the particular portfolio of the large cap funds are considered to be relatively balanced compounder as well as regular dividend portfolios. As far as the risk spectrum is concerned, the large cap mutual funds are able to offer steady returns along with lower risks comparatively. Therefore, the mutual fund experts suggest the investors adopt a long-term perspective and then to remain invested to ensure good returns over a period of long term.
- Small Cap Funds: The small cap funds or stocks usually have the greatest growth potential. As the underlying companies in this type of mutual fund are young, they usually seek to expand in an aggressive manner. As a result of these, the low cap companies are usually prone to certain economic or business downturn. This makes these small cap companies more volatile in comparison to the large cap companies.
The investors who are adamant on investing in the small cap mutual funds of the small cap companies might not have enough time to do the in-depth research. However, they might possess the high capacity to take potential risks for looking into making investments in the small cap mutual funds. When taken on the historic data, the small cap funds have underperformed in comparison to the large cap funds at times of recessions. However, they have outperformed the large cap stocks as the economy emerged from the periods of recession.
If you are keen on investing in any of the mutual fund schemes, then you must do your part of detailed research to come up with the best results. You must, first of all, determine your long-term as well as short-term investment goals. Then on the basis of the same, you can make the desired investment. You must review and maintain the investment plan on a regular basis for maximum returns.