Difference Between Small Cap Funds and Large Cap Funds

For some, it’s daunting; for some, it’s fun, whereas, for some others, it’s their passion – the arena of mutual funds is indeed an exciting one. And what makes it so exciting is its various ebbs and flows.

However, just like the ocean, the tides are higher on one end and more relaxed on some other – enter small cap and large cap funds. If these two options have been confusing you, this guide will shed much light.

What are small cap funds?

The term “cap” in small cap funds refers to a company’s capitalisation – which is ascertained by the total market value of its publicly-traded shares. Specifically speaking, small cap mutual funds are referred to funds of a publicly-traded company whose market capitalisation falls below Rs. 500 crores. Companies that are in their fledgling stages or seeking out aggressive measures to expand come under this category.

What are large cap funds?

Just the opposite of small cap funds; large cap funds refer to those stocks wherein a larger proportion of the investment is made in companies with a huge market capitalisation. Investors can expect sustainable and stable returns from large cap funds over a certain period of time; however, in the short-term, these funds may be outperformed by small or mid cap funds owing to the higher risk exposure of the latter two.

Key differences between the two

A proper distinction of the two will help you make the right investment choice in mutual funds India.

Basis of difference Small cap funds Large cap funds
Market capitalisation Investment made in companies that rank below 250 Investment made in companies that rank among the top 100
Level of risk involved These funds are highly risky due to their low capital base. However, they offer great growth potential. These funds are not risky at all. Typically, one may think of companies that rank among the NIFTY 50
Market volatility Highly volatile Less volatile
Liquidity Low High
Suggested investment horizon A period of at least 7 years A period of at least 3 years
Returns on investment Plenty of room for growth; however, the risk factor is equally high Offers steady and sustainable returns; however, may underperform when compared to small cap funds
Role of the fund manager A fund manager with thorough market knowledge of the small cap sector is needed as stocks may rise or fall sharply within days. Here, the fund manager needs to focus mainly on right stock selection and make decisions based on the investment objective of the scheme.

How to make the right investment choice?

Before you apply for mutual funds online, it is important for you to know which cap of funds to invest in. The way to know it is to determine your risk profile. Small cap funds are for aggressive investors who have a high-risk tolerance since the market is highly volatile. If you’re an investor who cannot stomach the volatility, then your best option is to invest in large cap funds that promise stable returns.

Regardless of whether you choose to invest in an SIP, equity, debt, or balanced funds, having a thorough knowledge of each option and a reliable and experienced investment manager by your side is all that is needed to enjoy lucrative returns on your investment.