Investment Tips: Large Cap, Mid Cap and Small Cap Explained : When we talk about investing in the stock market, large cap, mid cap and small are always mentioned. Whether investing directly in the stocks of companies or through mutual funds. Be it the details of asset allocation of mutual funds or any advice given regarding investment strategy, the discussion is not complete without discussing large cap, mid cap and small cap. This is why it is very important to understand the true meaning of these words while investing in the market. You should also know where among these you should invest.
What is the meaning of market cap?
Actually, the word ‘cap’ appearing in large cap, mid cap and small cap is the short form of ‘market capitalization’. Market capitalization or market cap is the sum of the latest market value of the total shares of a company and on the basis of this, companies are divided into three segments – large, mid and small. Securities and Exchange Board of India (SEBI) classifies all the listed companies on the basis of their market cap and also re-classifies them on the basis of latest market cap every six months.
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Definition of Large, Mid and Small Cap
SEBI has decided the definition of large, mid and small cap on the basis of their ranking in the market. According to this definition:
- The large cap category includes those top 100 companies whose market cap is the highest in the market.
- Those companies are kept in the mid cap segment, which come from 101st to 250th rank on the basis of market cap.
- Those companies are kept in small cap category, which come in 251st rank and above on the basis of market cap.
Before investing in these three market segments, it is important to know what are the advantages and disadvantages of investing in these and which investment option is best for you.
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Large Cap Features
Large Cap Stocks, i.e. shares of top 100 companies according to market cap, are also called “blue-chip stocks”. These companies are well established and the risk in them is comparatively less. Generally, these companies perform well in the market and are less affected even in times of downturn. Generally, these companies are profitable and also pay regular dividends, due to which investors get continuous income. However, the growth rate of large cap companies is not as fast as that of mid cap or small cap companies. This is because these companies are already at the forefront of their industry or sector.
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Mid cap specialty
Mid Cap Stocks are those shares of companies which are neither at the top nor at the bottom in the market in terms of market cap. According to SEBI’s definition, these companies falling from 101st to 250th rank are in the growth phase and hence their potential returns are higher than large cap companies. Compared to large caps, high growth potential is a major specialty of mid caps, but investing in them is also considered more risky. However, the risk in these is less as compared to small caps. That is why mid cap is also considered an investment that balances risk and return.
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Advantages of small cap
Small Cap Stocks are the shares of those companies which are ranked 251st or above in terms of market cap as per the definition of SEBI. Investing in these stocks is considered more risky, but they have high growth potential. Generally, the market cap of small cap companies is less than Rs 5000 crore. These have the potential for faster growth than large caps and mid caps, but at the same time the risks are also higher than them. Being comparatively small companies, they have more volatility and are most affected by market fluctuations.
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In which segment should you invest?
Before deciding which option among large cap, mid cap and small cap stocks is right for you, you need to have a proper understanding of your financial goals, risk appetite and investment horizon. When doing this you should consider the following things:
- Large cap stocks are less volatile and considered safe for investors. Therefore, for investors who do not want to take much risk, large cap stocks are a better option.
- Mid cap stocks have slightly higher risk than large caps, but they can give balanced returns to investors.Therefore mid cap stocks are considered right for balancing risk and return.
- Investing in small cap stocks can provide the highest returns to investors, but it also has the highest risk associated with it. Therefore, small cap stocks are suitable for those who have the ability to take more risk to earn more profits.
- Although investing in equity is always considered better for the long term, but it is even more important to have a long term view while investing in mid cap and small cap. Because these fluctuations can prove to be harmful for investors in the short term.
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Benefits of diversification across different market caps
While making the right investment strategy for yourself, you can also choose the path of diversification across different market caps. By investing in stocks or funds with different market caps, you can prepare your portfolio for both stability and growth. For example, when there is a recession in the economy, large cap companies perform better because they are well established. But when the economy picks up, mid cap and small cap companies can earn more profits. Large cap stocks included in such a portfolio will give you stable returns, while mid cap and small cap stocks can give better returns over time. Whether investing in equity directly in stocks or through mutual funds, there is always market risk associated with it. Therefore, before deciding to invest, it is important to take advice from a good financial advisor.