Market Capitalization: What is Market Capitalization and why is it important?

Every time you set on a new journey, be it taking up a new course or going on a vacation, it is always better if you know the basics before starting off. Similarly, as you start investing in mutual funds in India, it is advisable to gather some essential knowledge which may help you make favourable investment decisions. It can also help you navigate through too many types of funds and multiple jargons related to them.

to start with, it is important to know about different types of mutual funds before making any investment decision. For example, equity mutual funds can be categorised into large-cap, mid-cap, and small-cap funds based on the market capitalisation of the underlying companies in the portfolio.​

Let us help you understand the key differences between these types of funds to make the right investment decisions.

What is Market Capitalisation?

Market capitalisation refers to the market value of all the shares owned by the shareholders of a company. Multiplying the total number of outstanding shares of a company with the current market value of one share gives you the exact market capitalisation.

The Securities and Exchange Board of India (SEBI) has set certain regulations based on which companies are classified into three types in terms of market capitalisation.

Large Cap Companies

• These constitute companies ranking from 1st to 100th as per their market capitalisation
• Most of these companies have good track record and are also known as ‘Blue Chip Stocks’
• The mutual funds that mainly invest (minimum 80% of total assets) in the stocks of large cap companies are known as large cap funds

Mid Cap Companies

• These constitute companies ranking from 101 to 250 as per their market capitalisation.
• The Mutual funds that hold a minimum of 65% of total assets in stocks of mid-cap companies are referred to as mid-cap funds
• They are relatively riskier than large cap funds

Small Cap Companies

• Companies ranking below top 250 companies based on market capitalisation
• In general, these companies may not have a long track record
• The mutual funds that predominantly invest (at least 65% of total assets) in stocks of small cap companies are called small cap funds

Market Capitalisation Formula

You can easily determine a company's market capitalization, often referred to as market cap, using a straightforward formula. To grasp the concept of market cap, it's essential to understand that it is derived from the total number of outstanding shares issued by the company and the current market value of a single share. Market capitalization is obtained by multiplying these two factors, yielding the company's market cap value.

Understanding Market Capitalisation

Based on market capitalisation, SEBI further categorises the stocks as large cap, mid cap, and small cap companies.

SEBI categorises large cap companies as India’s 100 largest companies based on the value of their market capitalisation. These are ranked from 1 to 100 Typically, a large company can be a market leader with a consistent record of delivering on expected results. Large cap companies can be considered to be safe investments and less volatile than mid cap and small cap companies.

Next in line are mid cap companies - ranked from 101 to 250 based on the size of their market capitalisation. Mid cap companies are considered to be on a path of growth and consistent results from being small cap companies. Mid cap companies can be considered to be reliable investments with generally more volatility than large cap companies and less volatility than small cap companies.

Small cap companies are companies ranked from 251 onwards in terms of market capitalization. These are likely to be less mature or smaller companies, which are either nascent in their journey of growth and value creation or are on their way to maturity. Since these companies are new or small, there is less information available on them and therefore they are considered to be riskier and more volatile investments.

How to calculate Market Capitalisation

Consider company ABC, for example. Let’s say its current market price is 100 Rs. per share and it has 2000 outstanding shares.

To calculate the market cap of ABC, we shall multiply these numbers.

So, the market cap for ABC is 100 x 2000 = 200,000 Rs.

Importance of Market Capitalisation

Based on market capitalisation, companies are categorised differently. For example, a large cap company and a mid cap company are different from each other not only in size, but also in terms of market share, price volatility, and other factors.

Comparison between Mid Cap, Small Cap, and Large Cap Funds

Additional Read: Advantages of SIP in Volatile Market

Who Should Invest in Mutual Funds Based on their Market Capitalisation?

Investing in equity mutual funds requires you to have a good understanding of the market capitalisation of the underlying companies. Before you get started with KYC for mutual fund investments, you need to know the following:

• If you are a conservative investor looking for good returns over longer horizons, you can choose to invest in large cap funds
• If you can tolerate comparatively higher risk and have a long investment horizon, you can go for mid-cap funds
• As an aggressive investor with a very high-risk tolerance and longer investment horizon, you can invest in small-cap funds

Wrapping Up

The classification of mutual funds as per market capitalisation can help you understand which type of equity fund best suits your risk profile. Remember, a wrong investment decision made in a hurry and with unrealistic expectations can make you lose your capital. Hence, it is advisable to be careful while investing in mutual funds.

FAQs

1. Can mutual funds help create wealth?

Mutual funds in India can help you create wealth provided you select the right funds based on your risk profile, mutual fund market capitalization, and time horizon. It is advisable to note that patience will help you provide a better investment experience.

2. Are mutual funds suitable for those who don’t want to invest in equities?

As an investor, it is important for you to first understand how mutual funds work and what you can expect from your investments in different types of funds before reaching any conclusion.

3. Should goals be for the long term only or short term?

You can start investing in different types of mutual funds to fulfil both short-term and long-term goals.

4. What is the importance of market cap?

The importance of market capitalisation is that it represents the net value of the collective company owed to its shareholders. It can indicate a company’s place in the market.

Companies are typically categorised by SEBI as large cap, mid cap, and small cap.

5. What happens when the market cap increases?

The market cap of a company increasing can indicate that it has a heightened earnings potential. However, this may not always be the case. It is also possible that a company may not meet its earnings potential.

However, a company’s market cap raised over a period of time can propel it to a different level of categorisation. For example, a company can move from being a small cap to a mid cap, or from a mid cap to a large cap.

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The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.