Developing a mutual fund (MF) portfolio can occasionally be challenging. Different people will give you different opinions on how to build a mutual fund opinion. Furthermore, you are likely to get other views on how you must allocate your hard-earned money to each area.
However, given the characteristics of companies with diverse market sizes and their risk-return profiles, the allocation will definitely alter for investors with different risk profiles.
Due to the large number of equity mutual funds offered on various platforms, investing in mutual funds can be complex for novice investors. To reach one’s financial objective, it’s critical to create a well-balanced mutual fund portfolio that matches their level of risk tolerance. Small or micro-cap funds and mid-cap funds are the two divisions of equity mutual funds based on market capitalization.
Let’s look at them in more depth to better understand how and where you may invest your hard-earned money for the greatest return.
What are Small Cap Mutual Funds?
One of the key factors to consider when choosing what goes into your stock portfolio is the company’s capitalization.
Small Cap Funds invest in all businesses outside of the top 250 by market capitalization. These funds guarantee a more significant upside of return over the long run. However, it is somewhat riskier and volatile in the short to medium term compared to other equities-focused funds.
These companies’ stock prices may increase by a factor of two or even three in a very short time. The risks do, however, continue to exist, just like they do with most market investments. To ensure that you are not losing out on the returns that can be obtained from them, you should retain a modest portion of the finest small-cap mutual funds in your investing portfolio.
Why Should You Invest in Small Cap Funds?
Small-cap funds originate from businesses that grow quickly. As a result, if you invest money in these businesses, you may anticipate seeing a significant return on your money. However, you must keep an eye on your fund manager’s reputation as well as the performance of your funds since these aspects will help you decide whether to pick the fund or not.
What are Mid Cap Mutual Funds?
Mid-Cap Funds make investments in the stock and securities of mid-cap firms. Mid-cap firms, as defined by the Securities and Exchange Board of India (SEBI), are those that fall between ranks 101 and 250 on the list of corporations based on market capitalization. To give you a good indication, the 101th firm on the list has a market size of around INR 30,000 crores, while the 250th company’s market cap is about INR 9,500 crores.You can also consider the XIRR in mutual fund.
Mid-cap corporations provide benefits and drawbacks to both small-cap and large-cap companies since they sit in between. Although they are more volatile than large-cap funds, mid-cap funds often provide higher returns.
On the other hand, they tend to give lower returns while being more reliable than small-cap funds. Mid-cap mutual funds, in a nutshell, offer the ideal balance of risk and return. As an investor, you may anticipate significantly higher returns if you choose the schemes carefully and include a superb selection of equities, sector diversity, and a skilled fund manager.
Why Must You Invest in Mid Cap Mutual Fund?
Large Cap Mutual Funds are less risky than Mid Cap Mutual Funds. Therefore, if you have a larger risk tolerance, you should choose these programmes. You also require an investing horizon of between 8 and 10 years. Keep in mind that there are several investing and wealth-building opportunities in the mid-cap market.
Therefore, it’s crucial to choose a plan that places a lot of emphasis on market research and identifying worthwhile investment prospects. If you don’t like taking chances, you should think twice before investing in mid-cap funds. Before choosing to invest in mid-cap funds, make sure you take your financial objectives into account, as well as your risk tolerance and investment horizon.
Difference Between Small and Mid-Cap Mutual Funds
| Aspect | Small-Cap Mutual Funds | Mid-Cap Mutual Funds |
| Market Capitalization Range | Generally, invest in companies with a smaller market capitalization. | Typically, invest in companies with a moderate market capitalization. |
| Risk and Volatility | Higher risk and volatility due to smaller, less-established companies. | Moderate risk and volatility compared to small-cap and large-cap funds. |
| Growth Potential | Higher growth potential because of the potential for small companies to grow rapidly. | Still have good growth potential but are somewhat more stable than small-cap funds. |
| Investment Horizon | Typically suitable for long-term investors with a higher risk tolerance. | Suitable for investors with a moderate to long-term investment horizon. |
| Historical Returns | Historically, small-cap funds may offer higher returns over the long term but with more significant fluctuations. | Historically, mid-cap funds offer good returns with slightly less volatility compared to small-caps. |
| Investment Objective | Aim to provide substantial capital appreciation over time. | Aim to provide a balance between growth potential and reduced risk compared to small-cap funds. |
Conclusion
Both midcaps and small-cap funds have risks in the short to medium term due to the stocks they invest in. These funds are appropriate for young investors who want to save for long-term objectives like retirement, a child’s education, etc. This is because they have the financial means to withstand the volatility of these funds over a 5-7-year period.
However, it does not follow that all young investors in their 20s and 30s must include these funds in their investment portfolio. These should be avoided by a young investor with moderate to high-risk aversion, who should instead stick to the more reliable big-cap funds or investigate multi-cap funds that have equal exposure to large caps, midcaps, and small caps.
