Mutual funds are most commonly categorized using market capitalization, which indicates the size of companies that constitute a majority of the fund's portfolio.
SEBI has laid out broad definitions for these mutual fund categories as well as the names of mutual fund schemes to ensure they are accurately represented to any investor. Each category has its own risk and return characteristics that should align with the investor's target return and risk profile prior to any investment.
Also, past returns should not be the sole criteria to select mutual funds as they don't guarantee future returns. Therefore, we recommend our clients to select mutual funds based on a range of criteria:
Reputation of Mutual Fund House/Fund Manager
Fund Asset Size and Turnover
Consistency in scheme returns across different time periods
Risk measures (Standard Deviation and Return-Risk ratios, e.g. Sharpe Ratio)
Large Cap:
Large Cap mutual funds invest a majority of their AUM in large cap companies, i.e. top 100 companies based on market cap (or with market cap of at least Rs. 28,500 crores* as of Dec 2020).
The risk associated with large cap funds is comparatively lower to other market cap based mutual fund categories.
Large and Mid Cap:
Large and Mid Cap mutual funds invest a majority of their AUM in large and mid cap companies, i.e. top 250 companies based on market cap (or with market cap of at least Rs. 8,375 crores* as of Dec 2020).
The risk associated with large and mid cap funds is comparatively higher to large cap funds but lower than midcap or small cap mutual fund categories.
Flexi Cap and Multi Cap Funds:
Flexi Cap mutual funds are allowed to invest their AUM across all listed companies (irrespective of market cap), provided at least 65% of its AUM is invested in equity investments.
These also include Multi Cap funds, which similar to Flexi Cap funds can invest across all listed companies, however they are further required to invest at least 25% each in large, mid and small cap companies.
The flexibility afforded to flexi cap funds should allow fund managers to provide the best returns across all equity based mutual funds, however that has not proven to be true so far. The risk associated with flexi and multi cap funds is comparatively higher to large cap funds but lower than mid cap or small cap categories, given their ability to diversify risk across large, mid and small cap companies .
Mid Cap:
Mid Cap mutual funds invest a majority of their AUM in mid cap companies, i.e. companies ranked 100-250 based on market cap (or with market cap between Rs. 8,375 - Rs. 28,500 crores* as of Dec 2020).
The risk associated with mid cap funds is comparatively higher to large cap or flexi cap funds but lower than small cap funds, as any company with market cap among the top 250 listed companies in India would already have a good amount of publicly available information, coverage from major institutions and investments from domestic or foreign institutions.
Small Cap:
Small Cap mutual funds invest a majority of their AUM in small cap companies, i.e. companies ranked 250+ based on market cap (or with market cap below Rs. 8,375 crores* as of Dec 2020).
The risk associated with small cap funds is highest when compared to all other market cap based mutual fund categories, primarily due to the lack of publicly available information available on these companies, including analyst reports or coverage by major investors / institutions. Investors have to rely on the mutual fund / AMC and the fund manager to do the required due diligence while selecting companies for such funds.
However, these funds also provide investors a great opportunity to indirectly invest in future mid and large cap companies (potential innovators or disruptors) early in their growth phase for multi-bagger returns, which they may miss in their direct equity portfolio(s).