What is Market Capitalisation and Why it Matters in Mutual Funds Investing

What is Market Capitalisation

Market capitalisation can be described as the total value of the outstanding shares of a company in a stock market. It is determined using the following formula:

MC = P X N

Here,

• MC = Market Capitalisation,
• P = Current Market Price per Share, and
• N = Number of Outstanding Shares

For example, if-

Current Market Price per Share (P) = ₹ 250

Number of Outstanding Shares (N) = 50,000, then

Market Capitalisation (M.C) = 250 x 50,000 = ₹1.25 Crore.

Types of Companies Based on Market Capitalisation

Companies are categorised according to their market capitalisation. This classification is applicable to mutual fund investment. It enables the investor to assess the size, financial capability and the level of risk of the firms in the portfolio of the fund.

Below are mentioned how companies are categorised based on their market capitalisation:

1. Large-Cap Funds

   Large-cap funds are also known to be invested in companies that are in the top 100 in terms of market capitalisation in India. These companies are typically well-established, well-balanced, and well-founded in the market. Consequently, large-cap funds are more likely to have a smooth price movement with reduced volatility.

2. Mid-Cap Funds

   Mid-cap funds focus on companies ranked between 101 and 250 by market capitalisation. These businesses are in a growth phase and show strong expansion potential. Mid-cap funds provide higher growth opportunities than large-cap funds but involve moderate to higher volatility.

3. Small-Cap Funds

   Small-cap funds invest in companies ranked 251 and beyond by market capitalisation. These firms can grow quickly in favourable conditions and adapt easily to market changes. While small-cap funds offer high return potential, they are more volatile and carry higher risk.

Difference Between Large-Cap, Mid-Cap, and Small-Cap Funds

The major differences in large-cap, mid-cap funds and small-cap funds are the size of the company, the level of risk, and the potential for growth. Knowledge of such differences aids investors in selecting funds that suit their financial objectives and risk tolerance.

Here is a brief comparison of large-cap, mid-cap, and small-cap funds:

Key Takeaways

Market capitalisation is an essential part of the mutual fund investment since it helps the investor in estimating the size, stability, and risk profile of companies. Large-cap and a combination of growth and risk are stable and less risky with large-cap funds and mid-cap funds, respectively. Small-cap funds, on the other hand, come with higher potential returns of higher volatility. Investors can then select funds that are within their financial interest using this information.