Large Cap vs Mid Cap vs Small Cap MFs: Which equity mutual fund to choose? Here is your complete guide

Investing in mutual funds can be confusing for first-time investors, as there are numerous funds available on different platforms. It is important to build a well-balanced mutual fund portfolio that aligns with one's risk appetite to achieve their financial goal. On the basis of market capitalisation, equity mutual funds are divided into three categories: small or micro-cap funds, mid-cap funds, and large-cap funds. Let's take a look at these in a little detail to understand how and where one may consider parking their hard-earned money for maximum benefit.

Large-cap mutual funds

According to Priti Rathi Gupta, Founder & MD, LXME, large-cap funds are equity funds that invest at least 80 per cent of their total assets in large-cap stocks. Large-cap companies are strong and established companies with a good track record that are comparatively less risky and provide stable returns. "Large-cap funds invest in the largest companies, typically those with a market capitalisation ranking from 1 to 100," said Amit Gupta, MD, Sag Infotech.

Mid-cap mutual funds

Mid-cap funds are equity funds that invest a minimum of 65 per cent of their total assets in mid-cap stocks. They invest in medium-sized companies, which have the potential for growth and involve more risk than large-cap funds. Mid-cap funds invest in mid-sized companies that rank between 101 and 250 in terms of market capitalisation. 

Small-cap mutual funds 

Small-cap funds are equity funds that invest a minimum of 65 per cent of their total assets in small-cap stocks. These are the smaller companies or the ones that are new to the market. They have high growth potential but also carry a high amount of risk since they are new. Small-cap funds invest in companies ranking 251st onwards in terms of full market capitalisation.

Now, let's see how one should choose mutual funds.

While deciding which fund to invest in, one must take into account their own financial goals, risk tolerance, and investment horizon and should always avoid herd mentality.

According to Abhishek Banerjee, Founder & CEO of Lotusdew Wealth & Investment Advisors Pvt Ltd, "One must always remember that as market capitalisation reduces, the risk usually increases as there are more smaller companies, which may be exposed to the risk of not being able to sustain competition from larger companies or unorganised sectors."

Here are some expert tips for investing:

-Have a long-term view while investing.

-Evaluate your financial goals, define them with timelines, and then select the best-suited mutual funds based on their risk tolerance.

-Don't fall for short-term market volatility; continue to make investments and diversify the money across market caps to optimise their returns.

-Invest in a balanced manner.

-Evaluate fund managers and their credentials, how many other funds they manage, and what has been their performance across the different funds they manage.

Common mistakes to avoid:

-Impatience

-Failing to establish a long-term plan.

-Letting emotions and fear influence your decisions.

-Not diversifying the portfolio.

-Waiting for the right time to start investing.

-Investing based on hearsay.

-Having a very short horizon to make money.

-Not personalising the investment.

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