What’s the first thing that comes to mind when someone says small cap, large cap and so on? Are they referring to the size of the hats they wear? As you’ve probably guessed, it’s to do with money, or more specifically, investing.
As a new investor, does the stock market appear like a maze to you? Stumps you like a complicated riddle? Me too! I struggle to take out the time to invest in the stock market, given I have a full-time job. That’s why I choose mutual funds. They’re simple and easy to invest in and don’t require my constant attention. Mutual funds participate by putting money pooled in from various investors into the stock market in different assets, including company stocks. Now, what are these company stocks?
Stocks in the securities market are usually classified based on their market capitalisation. These include large-cap stocks, mid-cap stocks, and small-cap stocks, and all of them have their unique patterns and trends. This blog aims to demystify some of these concepts and help you understand the difference between large-cap stocks, mid-cap, and small-cap stocks.
Known in the market lingo as market cap, it refers to the market value of the shares of a company held by all its shareholders collectively at any given point in time. Industry analysts and economists also use this to estimate the valuation of a company. As per the rules from SEBI, all Indian companies are put under three categories based on their market cap.
No prizes for guessing, large-cap companies are massive establishments that are well established, fairly stable and able to sustain performance even during volatility and market turmoil. To put specifics around the definition, these companies need to have a minimum of Rs. 20,000 Crores in market cap to be eligible to be termed a large-cap company. They are often referred to as ‘blue-chip companies’.
Notable examples include: Reliance Industries, Tata Consultancy Services, Hindustan Unilever
Mid-cap companies are well established too but entail slightly higher risk than large-cap companies. As per valuation definition, they are above Rs. 5000 Crores and less than Rs. 20,000 Crores in market cap. Yes, there is more risk involved in the shares of companies! However, when it comes to the scope of growth, mid-cap companies show more promise than established large-cap companies.
Notable examples include: Crompton Greaves, Voltas, Procter & Gamble, Blue Star Electricals
Companies with a valuation below Rs. 5000 Crores are termed as small-cap companies. While they have lower revenues and are smaller in size, the growth potential in many of these companies is usually higher. However, this potential is also what makes them the most volatile category among the three, with frequent upward and downward swings.
Notable examples include: Bajaj Consumer Care, INOX Leisure Ltd, Coffee Day, Force Motors
Another categorisation, while not popularly used, is penny stocks. These stocks have a very low market cap (usually less than Rs. 100 Crores) and trade at low prices. While it is not set in stone, stocks trading at prices lower than Rs. 10 are clubbed in the penny stocks bracket. These stocks are also highly volatile and considered the riskiest of the lot due to fewer shareholders and limited information available to conduct an in-depth fundamental or technical analysis.
On the other hand, penny stocks have the potential to grow and can also turn into multibaggers.
It refers to stocks that give more than 100% returns in a short span of time. So, if you own a large quantity of a penny stock, even a slight increase can lead to a significant windfall. If only this could be accurately predicted *sigh*.
Notable examples include: Eicher Motors, Adani Wilmar, SBI Life, Tata Elxsi, Trent
While the main difference between large-cap and mid-cap companies is their market cap, the other implied differences include factors like stability, the potential to grow and liquidity. The liquidity stems from the fact that large-cap shares can be bought fairly quickly and sold without causing too much commotion in the market.
If you analyse small-cap vs large-cap companies, you will realise they are on the opposite ends of the financial spectrum. While large-cap stocks are more stable, resilient and well suited for conservative investors, small-cap stocks are fraught with risks and volatility. Hence, small-cap stocks are best suited for aggressive investors with short-term goals.
The same principles are applicable even in the case of Mutual Funds. When choosing the funds to invest in, you can check which type of stocks the AMC will invest in. The term ‘large-cap fund’ implies that the specific fund invests in stocks of large-cap companies, and so on for the other categories. So, less risky funds will have more investments in large-cap companies, and high-risk funds will have more exposure in small-cap companies.
Most financial advisors recommend having a diversified portfolio with a healthy mix of market cap categories. This provides a hedge to exposure in one particular category of companies. For example, when the mid or small caps might be underperforming, the large-cap shares and units can help steady your portfolio or the other way round.
Now that you have understood the difference between the three, choosing the kind of market cap category to invest in entirely depends on your own investment strategy, risk appetite, financial goals and time frame based goals. Irrespective of the option you choose, careful research and due diligence should feature as a mandatory requirement before investing your hard-earned money.
Mid-cap meaning mid-capitalisation, is a class of stocks or funds that relate to companies that are mid-sized in terms of their market capitalisation. A rough thumb rule is that - the smaller the capitalisation, the riskier the investment. This is because, they have greater potential to grow, but also lack the resources of a large cap company. This makes small-cap companies more vulnerable to market fluctuations. Conversely, mid-cap stocks or funds are less riskier because they’re higher up on the table. In short, if you’re looking for a greater growth potential, then a small-cap fund is better, but that’s provided you’re okay to handle the risk that comes with it.
If you’re looking for steady, long-term growth, then a large-cap fund is ideal for you. This is because while your investment may grow relatively slowly, your money itself is at lesser risk in comparison to small or mid-cap funds. On the other hand, if you’re looking for quicker returns then you could consider investing in small-cap companies that are riskier but offer better returns.
There are also flexi-cap mutual funds which don’t restrict themselves to large, mid, and small-cap stocks. As the name suggests, they invest in companies of varying sizes to optimise for your investment’s growth.
When investing in a mutual fund, you can check the details of the stocks that the fund invests in. This should generally tell you how much of the fund invests in large-cap stocks, mid-cap stocks, and so on.
Large-cap stocks are stocks of companies that have a market capitalisation of ₹2,000 crore or more. A simpler way to define these 3 categories is to look at the top 100 companies on the index, the next 150 companies qualify as mid-cap companies, while the rest are small-cap.