Do you know the difference between large-cap schemes and mid-cap schemes? Is there a common definition of what is large-cap, mid-cap and small-cap? Well, read my article in Mid-day, Gujarati to understand how SEBI circular on mutual fund scheme classification and categorization has made life easy for the investors.
The English translation of the same is as under:
In one of our earlier write ups, we had discussed various equity mutual funds classified based on market capitalization. The market capitalization of a company is the price that the market puts on the entire company. In other words, it is calculated by multiplying the share price with the number of shares issued by the company.
Market capitalization = market price per share X number of shares
The above equation suggests that market capitalization is also the price at which all the shares of the companies can be purchased, which is nothing but buying the entire company.
Generally, well-established companies are market leaders in their respective segment. These companies are often referred to as bluechips. Being large in size and leaders in their respective markets, these companies often exhibit stability with growth. However, in most cases, the growth may be moderate since the base itself is large. These companies are also large normally in terms of market capitalization, known as large-cap companies.
In comparison to these large companies, the second level of companies could be the promising ones, the bluechips of tomorrow. These companies may not be the market leaders, but carry the potential to be there in future. These companies are not large, but not so small, either. These companies are normally known as mid-cap companies – the companies with mid-sized market capitalization. These companies possess higher potential to grow as compared to large-cap companies, but may be more vulnerable to economic cycles.
The companies smaller than mid-cap are called small-cap companies. These may be more risky, but can grow even faster than mid-cap companies.
Mutual funds can launch schemes within these market capitalization ranges. In fact, this was allowed earlier, too and many fund companies launched large-cap, mid-cap, or small-cap funds. However, different fund companies had different definitions for the respective market cap ranges. How large would be a large-cap, and at what size a company would be called mid-cap or small-cap? The answers were different across different fund companies. This caused confusion among the investors. How does one compare one scheme against another?
Through the recent circular regarding mutual fund scheme categorization and classification, SEBI has defined these ranges. It would be binding on all the fund companies to stick to these definitions of different market cap ranges. This has now made life a lot simpler for the investors and their advisors.