Have you ever wondered what market capitalization stands for and how they impact you as an investor? You will learn from this article how market capitalization is an important factor when picking stocks for your portfolio:
Large-cap funds are those funds that invest a major portion of their corpus in shares of companies with larger market capitalization. Large-cap companies are reputed and trust-worthy as they are old and established companies with a good track record. These companies are generally perceived by investors to be stable businesses and thus they are much safer from the investment viewpoint. These business houses are known to generate wealth slowly for investors over the long term. Through large-cap mutual fund investments you can invest in these funds where a major portion of your investible corpus is invested in such companies as large-cap funds.
Being reputed and well-established companies, these businesses can help you generate a steady corpus along with regular dividend payment if you include them in your portfolio. Also, such investments are ideal for investors with lower risk-bearing ability. Investors need to take a long-term investment perspective and remain invested to get good returns on large-cap investments.
See Also: Different Types of Mutual Funds
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Mid-cap funds are the ones that can be placed in-between the large cap funds and the small-cap funds in terms of company size. These companies are relatively younger than large-cap companies, but they have the potential to grow and generate more revenues than large-cap companies. Since these companies are more susceptible to share market fluctuation and thus they are riskier investments. These companies are in their growth phase and they seek to expand by seeking suitable growth opportunities. Through mid-fund investments, investors can diversify their portfolios and look for considerable growth of their investments by taking advantage of the market timing.
These are ideal investments for investors with higher risk tolerance. So you can invest in such a scheme if you want to amplify your returns by taking a higher risk.
See Also: What You Must Know About Mutual Funds?
Mid-cap funds and large-cap funds are investment instruments meant for different types of investors. These funds are classified so that investors can benefit by investing according to their risk-taking capability.
Mid-sized companies have a higher potential to generate earning and thus gives steeper returns while they are riskier on the stock market index. Investors who are ready to take risks keeping in mind the market volatility can invest in these funds in expectations of attractive returns.
The large-cap funds underperform when compared to mid-cap and small-cap funds. However, these are a safer investment option when compared to mid-cap and small-cap funds. Investors should choose large-cap fund if they have a long term plan to remain invested. These will offer equity exposure to high-quality stocks and thus investment tenure of 5 to 7 years is recommended for these funds. But they are not completely immune to market fluctuation but they are capable of withstanding a slowdown.
See Also: How Mutual Funds Invest Your Money?
The most crucial aspects investors should keep in mind while choosing between the two are investment goal and risk appetite. If you are risk-averse then you should not invest in mid-cap funds as they are riskier than large-cap funds. However, experts say that investors often underestimate themselves when it comes to risk-bearing capability. Investors realize their risk-appetites only when they lose money at the stock market.
It is indeed true that risk and returns are proportional to each other. If the risk-return trade-off works in your favour then you will opt for a little more risk. To understand the concept of risk-return trade-off, we can compare the large-cap and the mid-cap funds:
The concept of a long term varies from investor to investor. For some, an investment of 5 years is a long term whereas other investors believe 5 years to be a short-term investment. According to financial advisors, equity investments should be made with minimum investment tenure of 3 years. Beyond this, the timeframe of long term can differ from one investor to the other.
Before choosing to invest in any of the two, investors must first identify their short-term and long-term goals. You may also seek the help of a financial advisor who can guide you to build an investment portfolio; you may also seek his advice on how to go about these investments. A financial advisor will decide for you taking into account the time frame, your financial goals and your risk tolerance ability.
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