When it comes to dealing with investment industry, having fair knowledge about its instruments is must. While choosing an investment scheme or taking suggestions from the broker, you might have, not once but many times heard terms like, Small Cap, Mid Cap, Large Cap and Multi Cap funds. And, if you are new to the industry, you are most likely to get confused among the various fund types. Choosing a wrong investment plan can bring you nothing but loss. This is why investors must have strong understanding of the market capitalization, also termed “market cap,” so that they can look for mutual funds that meet their risk and return expectations.
Let us help you explain, what these terms stand for and what’s the difference between them.
What does the term “Small, Mid, Large and Multi Cap” signify in Mutual Funds?
In Mutual Fund market cap, the terms, i.e. small, mid, large or multi cap does not indicate the size of the fund, but the company where the fund invests. Market cap or Market capitalization is determined by multiplying the current market price of a share with the quantity of shares outstanding. For instance, of a company have 2 million shares outstanding and sells them at rate of $100/share, then its market cap would be $200 million.
Under small-cap funds falls companies who have less than one billion dollar of market capitalization. However, investors should also know that these numbers can change with time and can vary in different brokerage houses. In general terms, small cap funds invest in companies that are in their early or initial phase of business. They have significant potential to grow, but are financially weaker than larger companies. Investing in small-cap funds means dealing with companies that are less stable, and thus can be highly volatile in nature. It can suffer greatly, but can also offer aggressive returns.
Mid-cap funds invests in companies that have market caps between one billion to eight billion dollars. Growth traits of Mid-cap companies are similar to those of small-cap companies; however they involve less risk than small cap companies. Since Mid-cap funds are less prone to violent swings, they make great investment option for investors, who wish to gain great returns with less risk and index-related returns similar to large caps.
Companies with market capitalization of $8 billion or above come under Large-cap companies. Such companies are huge in size and ideal for investors, who wish to make long term investments and would like to “hold” funds after purchase. Large-cap funds come with less risk and thus with lower returns in comparison to Mid-cap and small-cap funds. If you are seeking greater diversification & higher returns, large-cap is not the option for you.
These mutual funds are diversified in nature. Multi-cap funds can invest in stocks and resort to portfolio gyrations to match prevailing market condition. Such funds invest across market capitalization, which comprises of small cap, mid-cap and large cap companies. Investing in Multi-cap funds means relatively less risk than purely investing in small-cap or mid-cap funds, which thus makes it suitable for less-aggressive investors.
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