Diversify into small, medium and large-cap funds as the share market is unpredictable
Mutual Funds & Market Capitalisation
Mutual Funds (MFs) are an integral part of the Indian financial system. Mutual fund schemes are categorised into large-cap, mid-cap, or small-cap funds based on their investment allocation. For example, a large-cap mutual fund scheme will mainly invest in large-cap stock, while mid-cap and small-cap schemes will invest in mid-cap and small-cap stocks, respectively.
How do you choose the right mutual fund scheme for your investment portfolio?
A part of your decision-making will depend on your tolerance for risk. Large-cap funds will generally be the less risky option, whereas small-cap funds could carry a higher potential for growth. But before you start looking into such mutual fund schemes, it is important to understand the differences between them in terms of risk.
Risk in Large-Cap Funds
Large-cap funds invest mainly in blue-chip companies. Such funds inherently have certain advantages: The companies they invest in are large and stable businesses with the capability to weather market volatility. There is a high demand for these stocks, which makes them highly liquid. Their growth potential may be low, but so is the risk. And these funds generally bring modest but consistent returns over the long term.
Risk in Mid-Cap Funds
These mutual funds invest mainly in mid-cap stocks. This brings a slightly higher potential for growth, and thus the possibility of relatively higher mutual fund returns. However, the possibility of risk is higher as mid-cap companies are less able to cope with market volatility than are large-caps. The goal for the fund manager is to allocate funds to mid-cap companies that could be successful in the future.
Risk in Small-Cap Funds
The investment focus of these mutual funds is on small-cap companies. The risk exposure is higher with these funds, as small-cap companies are not well-established businesses. They may struggle to stay afloat during a recession, for example. But when a small-cap does well, the possibility of growth is higher than for mid-caps and large-caps. Small-cap funds try to tap into this possibility. Despite take he higher risk, there is a possibility of relatively higher returns.
Role of Market Capitalisation in Your Portfolio
Market capitalisation can play a significant role in your investment portfolio. As the share market passes through different phases, the performance of large-,mid-, and small-cap stocks keep changing. When large caps are not doing well, mid and small-caps could be on the rise. And when mid- or small-caps are plummeting, the large-caps in your portfolio could steady your overall returns. So, it is important for stock and mutual fund investors to diversify their portfolios by investing across market caps. It will help your portfolio to tide you over changing market conditions.
Just make sure to factor in your financial goals, appetite for risk, and investment horizon before investing. Also, keep in mind that investing in the share market or in mutual funds requires research and analysis. If you lack knowledge or need support, it may help to consult a reputed financial advisor or approach a credible broking house that can provide such services. This will bring you access to market research and analysis, along with a wide range of educational resources.