As India climbs to the rank of the fifth-largest global economy, the Indian mutual fund industry’s AUM has surged to an impressive Rs 57.26 lakh crore (AMFI, 30 April 2024) and continues to grow rapidly. Despite this growth, mutual fund penetration remains low, with only 4.5 crore investors in a country of 144 crore, representing just 3% of the population (United Nations Population Fund and AMFI, March 2024).
A key factor contributing to this under-penetration is the lack of awareness and understanding of industry jargon. The variety of mutual fund types also adds to the confusion. This blog will simplify the jargon and help you understand different mutual funds based on market capitalisation, starting with an explanation of what market capitalisation means.
What is Market Capitalisation?
Market capitalisation, or market cap, is the total value of a company’s outstanding shares of stock. It’s calculated by multiplying the number of shares by the price per share:
Market cap = Total number of outstanding shares × Price per share
Market cap provides insights into a company’s size and value. The Association of Mutual Funds in India (AMFI) releases a list of companies based on their market capitalisation twice a year, which helps classify companies as large-cap, mid-cap, or small-cap.
6 Types of Mutual Funds Based on Market Capitalisation
1. Large-cap Mutual Fund
A large-cap fund invests at least 80% in large-cap stocks, which are the top 1st to 100th companies in terms of market capitalisation. These companies are well-established with a history of stable performance. While large-cap funds offer lower risk and stable returns, they have limited growth potential compared to smaller companies.
2. Mid-cap Mutual Fund
Mid-cap funds invest at least 65% in mid-cap stocks, which are ranked 101st to 250th in terms of market capitalisation. These companies are growing but have not reached maturity like large-cap companies. Mid-cap funds offer higher growth potential but come with greater risk.
3. Small-cap Mutual Fund
Small-cap funds invest at least 65% in small-cap companies (251st and beyond in market capitalisation). These emerging companies offer the potential for explosive growth but are highly volatile and riskier, making small-cap funds a more aggressive investment option.
4. Large & Mid-cap Mutual Fund
A large & mid-cap fund invests in both large-cap (35%) and mid-cap (35%) companies, providing diversification. It offers a balance between the stability of large-cap funds and the growth potential of mid-cap funds, resulting in moderate risk.
5. Multi-cap Mutual Fund
A multi-cap fund invests at least 75% of its portfolio in equity and equity-related instruments across large-cap, mid-cap, and small-cap companies, with a minimum of 25% in each category. This fund provides diversified exposure, blending stability and growth potential.
6. Flexi-cap Mutual Fund
Flexi-cap funds invest at least 65% in equity instruments, with flexibility for the fund manager to allocate investments across large, mid, and small-cap companies based on market conditions. While offering higher growth potential, these funds can be volatile due to the manager’s active decisions.
Conclusion
Mutual funds come in various categories, each with different risk levels. Understanding market capitalisation and choosing the right type of fund based on your financial goals and risk appetite is crucial. There are many other types of mutual funds such as sector and thematic funds that add more complexity. Seeking guidance from a mutual fund distributor can help you make informed decisions tailored to your needs and risk profile, ensuring you navigate market volatility effectively.
