Basics of Mutual Fund

Mutual Fund

Do you understand the many terms used in investing in mutual funds? Do you struggle to understand the terminology used in mutual funds? Alternatively, are you unsure which mutual funds to buy as your next investment?

If the answer to the above questions is, yes, then let us explain you to in easy to understand manner.

It's possible that you were given advice telling you to invest in large- or mid-cap funds instead of small-cap funds. But what do the terms "large cap," "mid-cap," and "small cap" funds mean? How do you distinguish between large-cap, mid-cap, and small-cap funds? Let's start with the fundamentals to comprehend what the word "market cap" means.

What is market cap?

The technical term market capitalization is also known as market cap. Therefore, market capitalization is the market value of a company's outstanding shares. Market capitalization is the total market value of all the shares owned by a company's shareholders.

Market capitalization = total number of outstanding shares multiplied by the market price of each share.

Let’s understand this better with an example:

Shares of Company A are traded on a stock exchange. The market capitalization of business A would be Rs. 5 crores (1 lakh shares x Rs. 500) if it has around 1 lakh shares that are now trading at Rs. 500 each on the stock market.

So, based on market capitalization, companies are classified as large-cap, mid-cap, and small-cap.

The Securities and Exchange Board of India has defined certain rules to classify companies according to their market cap, to maintain uniformity in the financial markets for investments and trading.

Large-cap companies:

The stock exchanges are made up of all listed businesses ranked based on their market capitalization, per SEBI regulations. Large-cap firms are defined as the top 100 stock market corporations. Large-cap funds are mutual funds that invest in the equities of these large company firms.

The track record of large-cap corporations is often quite good. These businesses have a market valuation of at least Rs. 20,000 crores. These stocks are included in broad market indices like NIFTY and SENSEX due to their extremely significant market presence.

Mid-cap companies:

As per SEBI’s classification, the companies from rankings 101 to 250 in terms of market capitalization are known as mid-cap companies. Their market cap generally tends to range from Rs. 5,000 to Rs. 20,000 crores. Since mid-cap companies have a moderate to strong market presence, they may or may not be widely included in broad market indices.

Small cap companies:

According to SEBI regulations, small-cap companies are defined as those businesses with a market ranking of 251 or lower. Small-cap businesses typically don't have a long history. These firms may be relatively recent start-ups or those that are still in the planning stages.

In terms of market cap, these companies generally come in below Rs. 5,000 crores. Consequently, these companies enjoy little to no market presence and are mostly not included in broad market indices.

Conclusion:

Before investing in mutual funds, ensure you are aligned with your risk profile and investment goals.

Location: India

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