What Is The Difference Between Large Cap, Mid Cap, and Small Cap Funds?

Think about shopping for your favorite products. There are items from different brands at various prices. Some brands are very popular, have been around for years, and are trusted by everyone. Others are new and still growing. Then there are a few small, emerging brands that promise to succeed in the future.

The equity market is similar. It’s a place where you can buy shares of a company. Not all companies are the same! Some are huge, some are smaller and growing, and others are just starting out. This is where the terms large cap, mid cap, and small cap come in. They help us understand the size, potential, and risk of investing in different companies. In this blog we’ll understand what is market capitalization, what is large cap and mid cap and small cap, and difference between small cap, midcap, and large cap.

What is Market Capitalisation? 

So, how do we sort companies into large, mid, or small cap? That’s where market capitalisation, or market cap, comes in. Market capitalisation is simply the total value of a company’s shares.

In simple terms:

Market Capitalisation = Market Price of 1 Share × Total Number of Shares

Now, let’s think of market capitalisation like a tree in a garden.

Imagine each share of a company as a leaf on the tree.

• The price of a single share is like how big or healthy that leaf is.
• The number of shares is like how many leaves the tree has.
• When you multiply the price of one leaf (share) by the total number of leaves (shares), you get the market value (market cap) of the whole tree (company).
  • Big trees (Large Cap) have many strong and healthy leaves.
  • Growing trees (Mid Cap) are still maturing, but have a lot of potential.
  • Saplings (Small Cap) have fewer leaves and are still growing, but they can turn into something much bigger if nurtured well.

Large cap vs Mid cap vs Small cap

Parameter	Large Cap	Mid Cap	Small Cap
Market capitalisation	Above Rs. 20,000 cr	Within Rs. 5,000 – 20,000 cr	Below Rs. 5,000 cr
Liquidity	Very High	High	Low
Risk	Low	High	Very High
Probability of exceptionally high returns	Low	Medium-High	High
Volatility	Low	Medium	High

What are large-cap, mid-cap & small-cap mutual funds?

Now that you understand the basic concept, let’s discuss how you can invest in these different market caps. The easiest way to do this is through mutual funds. A mutual fund collects money from many investors to buy shares in various companies. Instead of purchasing shares of just one company, you’re investing in a mix of companies, depending on the type of fund you choose.

The Three Types of Funds: Explained with a Garden Analogy  

1. Small Cap Funds – The Budding Saplings  

• Market Capitalisation of Companies Mutual Funds Invests: Less than ₹5,000 crore
• Nature: These are new or smaller companies with big aspirations.
• Risk & Return: High risk but also high potential returns—like a sapling that could grow into a large tree or wither away.
• Perfect for: Risk-takers who don’t mind taking chances for high rewards.
• Market Volatility: High

2. Mid Cap Funds – The Growing Trees  

• Market Capitalisation of Companies Mutual Funds Invests: Between ₹5,000 crore to ₹20,000 crore
• Nature: These companies are neither too small nor too big. They are growing and often more stable than small caps.
• Risk & Return: Medium risk with the chance of good returns.
• Perfect for: Investors seeking a balance between risk and growth.
• Market Volatility: Medium to High

3. Large Cap Funds – The Big, Strong Trees  

• Market Capitalisation of Companies Mutual Funds Invests: More than ₹20,000 crore
• Nature: These are established companies—market leaders like Reliance, TCS, HDFC Bank, etc.
• Risk & Return: Lower risk but steady and consistent returns.
• Perfect for: Beginners or anyone who wants stable investments with fewer ups and downs.
• Market Volatility: Low

What if you want to invest in all market caps? 

If you don’t want to choose between large, mid, or small cap companies, you can spread your investment across all market caps for a diversified portfolio. That’s where Flexi-Cap and Multi-Cap funds come in. These funds invest in all three categories, so you don’t have to settle for just one size of company. 

Let’s explore these options:

1. Flexi-Cap Funds:  

• The fund manager can allocate money in any proportion across large, mid, and small-cap companies.  
• More flexibility means greater responsiveness to market changes.  
• Ideal for: Those who trust expert decisions and want active portfolio management.  

If you want to invest in flexi-cap funds, then you can check out Lxme’s Rs.100 Equity Fund, which invests in a flexi-cap fund that is well-researched and curated by experts.

2. Multi-Cap Funds:  

• These funds must invest at least 25% each in large, mid, and small-cap companies.  
• This strategy offers balanced diversification.  
• Ideal for: Investors looking for a safer mix across all company sizes.

If the market is doing well, the fund manager may increase small and mid cap exposure for better returns. In uncertain markets, they may reduce risk by increasing large cap exposure. This maintains a balance between risk and return.

Which One Should You Choose?  

• If you’re just starting your investment journey:
• Begin with Large Cap funds for stability.
• Gradually include Mid Cap for some growth.
• Add a Small Cap if you’re ready for more risk and fast growth.

You can check out Lxme app for equity mutual fund portfolios which are well-researched and curated by experts.

FAQs

Further read:

• What are Large Cap Funds and Should We Invest in Them?
• Why Hybrid Funds Are Smart Choice for Women Investors? 
• Top 3 Benefits of SIP in Mutual Funds