New to the mutual funds market and confused by the terms large cap and mid cap funds? Based on the market capitalisation or size of the company the funds are invested in, each of these two types of mutual funds brings with them unique opportunities and risks. Let us first understand each and draw a detailed comparison between the two.
Understanding large cap funds
Large cap funds receive their name based on the fund category they belong to, namely, market capitalisation. What this means is these equity funds invest a greater portion of their total assets in companies with a large market capitalisation or share. These companies are highly renowned and have a proven track record for generating wealth for their investors in the long run.
Following are the major benefits of large cap equity funds –
- They create long-term wealth
- They promise steady returns
- They carry a low degree of risk
Investors who have a low risk tolerance coupled with a long-term investment horizon will find large cap funds to be an ideal investment option.
Understanding mid cap funds
Again a mutual fund type based on the category of market capitalisation, mid cap funds are equity funds wherein a significant portion of the total assets (nearly 80% to 90%) is invested in mid cap or BSE listed companies. These companies typically have a market capitalisation that ranges between Rs. 500 crores to Rs. 10,000 crores. Though mid cap funds also come with a long-term investment horizon (around seven to 10 years), they usually carry a high degree of risk.
These equity funds are also useful in generating wealth over the years; however, they are the ideal investment option for investors with reasonably high risk tolerance levels.
Additional Read: Investment Strategy during Market Highs
Essential differences between the two
Now that the two fund types have been discussed, let us look at the major differences between the two.
| Point of Distinction | Large Cap Funds | Mid Cap Funds |
| Market Capitalisation | These funds are invested in top 100 companies. | These funds are invested in companies that fall between 101 to 250 |
| Portfolio Constitution | A minimum of 80% of the total assets are invested in equity or related securities of large cap companies | A minimum of 65% of the total assets are invested in equity or related securities of mid cap companies |
| Degree of Risk Involved | Low degree of risk involved | Higher degree of risk involved |
| Investment Horizon | Generally ranges from 3 to 5 years | Generally ranges from 5 to 7 years |
| Returns | Offers steady returns that help generate wealth in the long run | Higher returns than large cap funds; however, the risk involved is also higher |
| Suitability | Investors with a long-term investment horizon and a low risk appetite with expectations of steady returns | Investors with a high risk appetite and expectations of higher returns |
Additional Read: With the new SEBI rules, are Multi-cap funds worth the risk?
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