When understanding how to allocate funds for investing in equities, it is important to understand both your expectation of return and also your risk appetite. Once you are clear on these, it will be a lot easier for you to allocate money between the various categories of stocks.
A mutual fund categorized by market cap (i.e., small cap, mid cap or large cap) indicates the size of the companies in which the fund invests, not the size of the mutual fund.
Large cap funds – Large cap funds are those funds which invest a larger proportion of their corpus in companies with large market capitalization. Trustworthy, reputable and strong are three adjectives that are often used to describe a large-cap company. These are the old and well-established players with a track record. Such companies typically have strong corporate-governance practices, and have generated wealth for their investors slowly and steadily over a long term. These corporate houses are usually among the most highly followed and well-researched on the market. Mutual funds that invest a majority of their investible corpus in these companies are labeled as large-cap funds.
They are ideal for investors with lower risk appetite. So, adopt a long-term perspective, stay patient, and remain invested to reap good returns over the long term.
Mid cap and Small caps funds – These stocks typically have a high growth potential, since the underlying companies are young, and seek to expand aggressively. They are more vulnerable to a business or economic downturn, making them more volatile than large and mid-caps. Investors who are keen to invest in the small-cap space and may not have the time to research but possess the high risk-taking capacity can look to invest in small cap funds.
Small- and mid-cap funds typically outperform large-caps during a bull market, but decline more when the sentiment turns bearish.
As seen from the above discussion, an investor has three options to choose from as far as allocating money to stocks is concerned. And the allocation is dependent entirely on an investor’s risk appetite. All these categories consist of some really good long term investment opportunities. As such, investors must decide the allocation based on the opportunity’s merit and not just whether it is a large cap, mid cap, or small cap.
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