Large Cap vs Mid Cap vs Small Cap: Difference & Guide

In the beginning, I got completely lost with the terms like small cap, mid cap, and large cap. They were everywhere in discussions but nobody tried to explain them in easy words.

The fact of the matter is that a company's market capitalization only means the market's total evaluation of the company. The share price is multiplied by the total number of shares to arrive at this value.

In India, SEBI (Securities and Exchange Board of India) divides companies into three unambiguous classes depending on their market capitalization ranking. The full understanding of these classes was a turning point for me in the way I constructed my investment portfolio. Let me summarize all the essential information for you.

What are Large Cap Stocks?

The large-cap stocks in the Indian stock market are the top 100 companies that are valued the highest in the market. The companies that are large in size, well recognized, and have neat business histories are the ones that you sometimes see everywhere.

A large-cap stock is a stock of a company with a very high market value. Companies such as Reliance Industries, TCS, HDFC Bank, Infosys, and ITC can be considered for example. Usually, these companies have market values of more than ₹20,000 crores. Because their stocks are considered very safe, they are categorized as "blue-chip" stocks.

The big caps have a quality of their own and that is the quality of being stable. By generating consistent revenue, paying regular dividends, and enduring market downturns, they are in a better position holders than the smaller companies.

Who should invest: Conservative investors, retirees, and anyone looking for stable growth with lower volatility should focus on large caps.

What are Mid Cap Stocks?

Mid-cap stocks are those of the companies positioned in the middle, between 101 and 250, in terms of their market capitalization. These are companies that have been firmly established but still possess considerable room to grow.

What is a mid-cap fund? It's a mutual fund that puts its money mainly into these mid-sized companies. The market capitalization range is usually from ₹5,000 crores to ₹20,000 crores. Among these are Mphasis, Page Industries, and Tube Investments.

In my opinion mid-caps are very interesting because they give a good mix. They are not as risky as small caps, but at the same time, they are not giving the least profits either, as they are the most 'rumoured' large caps.

Who should invest: Investors with a moderate risk tolerance and a 5-7 year investment horizon are the ones who will find mid-caps attractive.

What are Small Cap Stocks?

What does small cap fund mean? These kinds of funds put their money in businesses that are placed 251 or more in the market capitalization ranking. These are usually companies with market caps that are less than ₹5,000 crores.

Small cap stocks are the darlings of the market. They are new, blooming firms that have a large upside but also a great uncertainty and risk attached to them. Many of them are not yet stable and thus they are highly volatile.

How about the Small cap vs mid cap? Small caps are much smaller in size, less liquid, and are swayed by market sentiment more. The small cap company has a market cap that is very low, so even a small investment can cause a price change.

Risk and return profile: High-risk investment with possible annual returns of 15-20% or even more over long periods. However, they might also suffer a loss of 30-40% of their value during a market crash.

Who are the right investors: Just very daring investors with a long (7-10 years) investment horizon and high risk tolerance should try their luck in small caps.

Key Differences: Small Cap vs Mid Cap vs Large Cap

Understanding the difference between small-cap, mid-cap, and large-cap is essential for wise investing. Let me show you a clear comparison.

The risk goes up when you switch from large cap to small cap. This small cap vs mid cap vs large cap comparison indicates that the high-risk area in investments is accompanied by a corresponding high-return potential—at the same time, losses run the same chances.

Small-cap stocks suffer the most during bad markets and they are also the slowest to get back on track. On the other hand, large-caps are still doing fine. The mid caps are like the large caps in the sense that they don't poll down so much and they recover as fast as the small caps.

Large Cap, Mid Cap, Small Cap Mutual Funds

Using mutual funds for large-cap, mid-cap, and small-cap investments is a smart option as it gives exposure to these categories without the worry of stock picking. The whole process of research, fund managers, and portfolio management do it.

These funds work like this: a large and mid-cap fund invests a minimum of 35% in large-cap stocks and 35% in medium-cap stocks, giving the investor a balanced exposure. Likewise, small-cap funds are exclusively dedicated to the companies that are not in the top 250.

Individual stock vs. fund investment is a key difference? Diversification and professional management. Using funds, your investment is distributed among 30-50 companies so the risk of any single stock killing your portfolio is minimal.

Flexi-cap funds will have an allocation to all three categories but not a fixed one which means that the fund managers will have complete flexibility depending on the market conditions. For a deeper comparison, check out mutual funds vs index funds to understand different investment approaches.

Which is Better for Investment?

When it comes to the question, "small cap mid cap large cap which is better," there is no definitive answer that applies to everyone. It entirely hinges on your individual circumstances, and this is how you could conclude.

Factors to consider:

Investment goals: Long-term wealth creation? It is advisable to go for small and mid-cap stocks. Stability and income? Then large caps will be the best option.

Risk tolerance: Are you capable of bearing 30-40% drops in your portfolio without losing your composure? In that case, small caps could be your solution. Do you want to sleep peacefully? Then go for large caps.

Time horizon: Are you planning to invest for more than 10 years? Then you can reap the benefits from small caps. Do you need your money back in 3-5 years? In that case, large caps are safer.

Age and financial situation: Young professionals, as a rule, can accept a higher level of risks. The retirees should be more concerned with security.

Recommended allocation strategies:

Conservative investors: 70-80% large cap, 20-30% mid cap, 0% small cap

Moderate risk-takers: 50% large cap, 30% mid cap, 20% small cap

Aggressive investors: 40% large cap, 30% mid cap, 30% small cap

If you're just starting out, consider reading our stock market trading tips for beginners to build a solid foundation.

Conclusion

Our experience says that among the three categories, it usually proves to be our best decision to describe the majority of servers. This plan allows you to get the benefits of growth from small caps while the stability of large caps is ensured simultaneously.

Use of Dhanarthi stock screener are best alternative tool which is used to analyze individual stocks, categorizing companies according to their market cap, financial metrics and several parameters.

These fundamental learning defines the basics of stock analysis that gets easier if you can systematically compare companies in the same category.

Disclaimer: This article is for educational purposes only and should not be considered as financial or tax advice. Tax laws are subject to change, and individual circumstances vary. Please consult with a qualified chartered accountant or tax advisor for personalized guidance based on your specific situation.

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