Market capitalization, commonly referred to as market cap, is an important concept of stock market, particularly for mutual fund investors. Market capitalization of a stock is the share price of a stocks multiplied by the total number of shares outstanding. Investors use market cap to denote a company’s size. Many investors also use market cap to determine risk of the investment. Smaller companies have higher chances of failing compared to large companies. As such, large market cap stocks are considered to be less risky and investors are ready to pay for it.
As per SEBI’s circular in October 2017, the 100 largest companies by market cap are classified as large cap companies / stocks. The two frontline stock indices in India, Sensex and Nifty, comprises of the 30 and 50 largest stocks respectively by market cap. Beyond the 100 largest stocks by market cap (large cap), the next 150 stocks by market cap (101st company to 250th company) are classified by SEBI as midcap stocks. The remaining (251st and onward) stocks trading in the stock exchanges are classified as small cap stocks.
Equity mutual fund schemes which invest primarily (80% of total assets) in large cap stocks are known as large cap funds. Schemes which invest primarily (65% of total assets) in midcap funds are known as midcap funds, while schemes which invest primarily (65% of total assets) in small cap stocks are known as small cap funds. There are mutual fund schemes which invest across market cap segments; they are categorized as multi-cap funds and large and midcap funds. Multicap funds have a flexible mandate – there are no market cap restrictions for these schemes. Large and midcap funds must invest at least 35% each in large and midcap stocks. You should understand the market cap composition of equity funds and be comfortable with the risks before investing.