Basics of Mutual Fund

 

Basics of Mutual Fund

Do you fully grasp the technical terms used in mutual fund investment? Is the language employed in mutual funds is it difficult for you to understand? Are you unsure of which mutual funds to purchase while searching for them for your upcoming investment?

If the answer to above questions is, yes, then let us explain you to in easy-to-understand manner.

You may have encountered suggestions to put your money in large- or mid-cap funds rather than small-cap funds. The definitions of "large cap," "mid cap," and "small cap" funds are unclear, nevertheless. How can you differentiate between funds with large-cap, mid-cap, and small-cap? To understand what the word "cap" means, let's start with the basics.

What is market cap?

Market capitalization is also referred to as market cap. A company's market capitalization is the market value of its outstanding shares. A company's market capitalization is the sum of the market values of all the shares that shareholders own.

Market capitalization = total number of outstanding shares multiplied by the market price of each share.

Let’s understand this better with an example:

A stock exchange is a place where shares of Company A are traded. If company A has around 1 lakh shares that are now trading at a price of Rs. 500 each on the stock market, its market capitalization would be Rs. 5 crores (1 lakh shares x Rs. 500).

So, based on the market capitalization, companies are classified as large cap, mid cap and small cap.

The Securities and Exchange Board of India (SEBI) has defined certain rules to classify companies according to their market cap, to maintain uniformity in the financial markets for investments and trading.

Large cap companies:

All listed firms are ranked on the stock exchanges according to SEBI standards based on their market capitalization. Large cap corporations are the top 100 stock market organizations. Large cap mutual funds buy the equities of these big corporations.

The historical returns from large-cap companies are positive. Market value for these companies is at least Rs. 20,000 crores. Because of their enormous market presence, these stocks are typically included in large market indices like NIFTY and SENSEX.

Mid-cap companies:

Mid-cap firms are ranked between 101 and 250, according to SEBI's definition. Their market capitalization typically ranges from 5,000 to 20,000 crores. Due to their moderate to significant market presence, mid-cap corporations may or may not be heavily represented in broad market indices.

Small cap companies:

According to SEBI regulations, small-cap companies are defined as those businesses with a ranking of 251 or lower. Small-cap businesses typically don't have a long history. These firms may be relatively recent start-ups or those that are still in the planning stages. In terms of market cap, these companies generally come in below Rs. 5,000 crores. Consequently, these companies tend to enjoy little to no market presence and therefore are mostly not included in broad market indices.

Difference between large cap, mid cap and small cap funds:

Particulars	Large cap	Mid cap	Small cap
Investor profile	Conservative investor with a long-term investment horizon	Moderately risk-tolerant investor with a long-term investment horizon	Aggressive investors
Risk	Possess relatively lower risk	Riskier than large cap	Considerably riskier
Volatility	Often less volatile	Slightly volatile	Highly volatile
Growth potential	A higher potential with stable returns	Moderate potential for growth	Considered to be high

Conclusion:

Make sure your risk profile and your investment objectives are in line before investing in mutual funds.

                                                               Blog Home | Visit Our Website | Investment