Small Cap Mutual Funds v/s Large Cap: Which is Better?

When it comes to mutual fund investing the investors have to choose between the high risk and return and the one who want to play safe. The worldwide investing debate between the small cap mutual funds and large cap mutual funds are permanent because they both present the unique benefit and challenges. In this article we will delve into this both category which gives investor a clarity to understand this mutual funds and their schemes. You also get the idea of which category is best for your mutual fund investment. 

 What are Small Cap and Large Cap Mutual Funds?

Let’s see how SEBI defines these two category:

1. Small Cap Mutual Funds

Small Cap Mutual Funds invest mainly in those companies which rank below the top 250 in terms of market capitalization. These companies are the newbies in the market which start their businesses and has the potential to grow in the mutual fund market. Small cap companies are capable to even beat the large cap ones and also has the potential to become large cap companies. 

2. Large Cap Mutual Funds

The Large Cap Mutual Funds are those fund which invest in top 100 companies according to the market capitalization, these companies are build the higher stable returns, and has low risks portfolio, which gives the investors a freedom to invest without any risk of market volatility. 

Performance Potential: Why Small Cap Mutual Funds Shines

While large cap funds offer stability, but the small cap funds are often considered a growth of powerhouse, Here’s Why:

1. High Growth Opportunities

The small cap mutual funds are on the stage where they start growing rapidly, these companies are capable of growing fast, increase revenue, and give the space to innovation. These companies will grow even in the volatile market but it has also the power to boom in the mutual fund market because of its potential to grow its revenue and also has the potential to become the mid cap companies. 

2. Under Priced Opportunities

If you want to choose these small cap mutual funds, then you have to invest in the early stage of the companies and the best part is you can purchase this funds scheme in low prices and have a taste of successful companies. You can also invest with the SIP (Systematic Investment Plan) with this plan you can gain better returns with low price and for the long term duration. The fund manager will do some research and purchase these companies stocks in low prices and they selected the high promising one which gives them better growth and potential for growth.

3. Market Recovery

The small cap mutual funds are sensitive during the market recovery but they bounce back faster during the recovery phrase improve. This category has the ability to generate better return even in the market ups and downs. When compared to the large cap mutual fund they too are sensitive during this phrase but has the main essential to drive slow growth, small cap gives the opportunities to grow even in the market hype. 

Risk v/s Reward: Small Cap Mutual Funds Are worth the Risk

There is no doubt that small cap funds are more volatile compared to large cap funds. However, for investors with a long-term horizon, this risk can be mitigated. Here’s why the risk associated with small cap funds is worth considering:

1. Time to Grow: Over a period of 7-10 years, small cap companies have the time to stabilize, expand, and grow their earnings. This extended horizon allows investors to capitalize on compounding growth, often leading to returns that significantly outperform large cap funds.

2. Diversification: While small cap funds are riskier, their high level of diversification across industries helps balance out the risk. A diversified portfolio of small cap stocks can reduce exposure to any single company’s performance, mitigating overall volatility.

3. High Alpha Generation: Small cap funds typically offer higher alpha, or risk-adjusted returns. Since they are less exposed to macroeconomic factors, a well-managed small cap fund can outperform benchmarks by selecting niche companies that have enormous potential for growth.

Why Large Cap Mutual Funds Are Safer (But May Not Grow as Fast)

Investing in large cap fund is like owning a piece of giant, safe companies, but also a slow growing ones. Here’s are the benefit of large cap mutual funds:

1. Stability and Consistency

Large cap is less volatile due to their large business growth model and financial foundations. They trend to perform well during a market downturn, and also has the potential to generate good return and also play safe in the mutual fund market. This category will also give consistent returns and build quality investment portfolio.

2. Lower Risk

It has contain low risk profile and this will offer the safest portfolio, with the low risk the large cap gives the investors a chance to invest freely without the worry of any loss. So it gives a safe investment option but when we compare this category to small cap fund it has more potential to generate higher returns. 

3. Brand and Reputation

Most of the large cap companies have well-known and trusted brand with share market, and these companies has the ability to grow even in the market fluctuations. This make them reliable for the long term growth, but the growth trends to be more predictable and thus less explosive compared to small cap funds

Best Small Cap Mutual Funds to Invest in?

1. SBI Small Cap Fund

The SBI Small Cap Fund is launched on 09.09.2009, with a quality-orientated asset under management of Rs. 33,058 crores and it also has shown great performance since its inception the compound annual growth rate (CAGR)- 21.5% and the magic brings when it outperformed its benchmark of 15.79%. By primarily investing in a well-diversified basket of equity stocks of small cap companies, the scheme aims to give investors opportunities for long-term capital growth along with the liquidity of an open-ended scheme.

2. Nippon India Small Cap Fund

The Nippon India Small Cap Fund was introduced to the investor on 01.09.2010 with a staggering return since its inception of 22.99% but it just does not stop here; this fund has outperformed its benchmark of 17.59%. The asset under management of Nippon India small cap fund is Rs. 61,018.3 crores. The scheme primarily invests in equity and equity-related instruments of small cap companies with the goal of producing long-term capital appreciation.

3. TATA Small Cap Fund

The TATA Small Cap Fund was established on November 2, 2018. With an amazing asset under management (AUM) of Rs. 8,878.54 crores, this fund has given it the best performance of 28.5% and it beats its benchmark of 17.59%. The scheme primarily invests in equity and equity-related instruments of small cap companies with the goal of producing long-term capital appreciation.

Conclusion

To conclude, the small cap mutual funds provide the best schemes to the investors grab this funds according to your desired goal, this mutual funds is suited for those who have the capability to take risk and okay with its high risk, but it also offers the high potential return even in the volatile market. The small cap mutual funds are so popular in the mutual fund market, this scheme has made position in the search engine result page and beats its competitors. The best part is this category even outperforms the large cap mutual funds with it high growth potential.