With regard to mid cap funds and small cap funds, there are varying reasons for investing in both of these categories. Investors should be careful about their core financial goals before choosing either a mid cap mutual fund or a small cap mutual fund. There is nothing as one category being better than the other. It all depends on what is better for you at a certain point or stage in your life, taking your risk tolerance, investment horizon and financial goals into account. You should first understand the basics behind market capitalization levels. Market capitalization is the value of the company which is being traded on the exchange and is calculated through multiplication of total number of shares by current share price.
The companies in the 1-100 slab are large cap entities while 101-250 entities are mid cap entities. Small cap entities are those from 251 onwards. Market capitalization is calculated with this formula- Current market price of a single share * total number of shares outstanding. Mid cap funds are those which are open ended equity schemes that predominantly invest in mid cap stocks as per the SEBI (Securities and Exchange Board of India) definition. Mid cap funds deploy investments in at least 65% of equity and equity linked instruments of mid cap entities. Small cap funds are those which are open ended equity schemes predominantly investing in small cap stocks. Small cap stocks are a sub-division of equity mutual funds where 65% of total assets are invested in equity and equity linked instruments of small cap entities.
You should take the differences between small cap and mid cap mutual funds into account before choosing. Firstly, the basic difference is that one invests in mid cap entities and one invests in small cap entities on the basis of market capitalization levels. Secondly, the risk levels are moderately high for both types of investments while both invest at least 65% in equity and equity linked instruments. Returns are always subject to volatility in the market without being guaranteed. Mid cap options are ideal for those investors with comparatively higher tolerance for risks while small cap options are suitable for investors willing to aggressively pursue growth opportunities. Both types of funds invest considerably in equities and are suitable for those with higher tolerance for risks. Equity funds are suitable for those investors with a longer investment horizon or tenure. If you are willing to remain committed to your investment for a longer tenure, then you may consider these funds for investment purposes.
Investing in both small and mid cap funds means that you should have a 4-7 year investment horizon for maximizing returns and overriding volatility as per experts. You will not have to worry about daily fluctuations in the market while benefiting from the power of compounding as well.
