To begin with the subject, it would be imperative to understand the meaning and relevance of small cap, mid cap and large cap funds before making them a part of your investment portfolio. Many of my friends and colleagues have minted money in dealing in small cap shares. A typical a small cap share is available in range of Rs 2-20 and if you get a “tip” to buy a particular share for a gain of say Rs 2-5 per share, the kind of gains that can be made are phenomenal. I am personal witness to people earning more than Rs 3 lac a single day on investment of just Rs 1 lac. This is not to encourage you to invest in small cap shares. More homes have been financially ruined by small cap shares than by any other form of gambling. Such small cap shares, the day they vanish, rarely appear or recover again.

On the contrary investing in large cap shares that are known to add economic value every quarter, when held for long term, never or rarely let you down. IT is not that a large cap would not lead you to irrecoverable loss. If you have capacity to hold a share for a medium term, if need be, and are learned enough to gauge impact of various sectoral changes as custom policies, you would never run in losses.

In a short term, mid cap shares are definite more rewarding than large cap shares. But you would rarely be able to know when this “short term” would end. Mid cap shares often defy the general sentiment or trend in the market and are more prone to market manipulations. A regular investor is generally able to earn high returns than earned by any mutual fund. However, in case of mid caps, investing in mutual fund that focuses on mid cap shares, is a better option as it is able to spread investments over a large spectrum of shares leading to higher net gains.

The definition of Mid and Large Cap

Although, there is no fixed definition of a large-cap company in India, in the international arena companies with market capitalization of more than USD 2-billion are regarded as large caps. That implies that a large-cap company is one with a market cap of more than Rs 8,000 crore. Market capitalization is calculated by multiplying the total number of shares issued by the company with price per share. For instance, if ABC Limited has issued 1 lakh shares in the market and each share has a cost of Rs 250, it’s market capitalization will be: 1-lakh shares x Rs 250 = Rs 25 crore.

Large Cap companies are generally included in sensex or nifty index and are generally blue chip companies. Investing in these companies is generally a safer investment option since these companies have consistent track record of performance over a consistent period of time and proved the ability to succeed over hiccups that come up during their initial years of operation. Of course there are some sectoral changes do affect returns in these shares. Few common such examples are Cipla, Ranbaxy, Infosystech, HLL which have delivered negative return in past six months because of changed economic environment (rupee hardening, drug policies etc). But the moot point is, if you continue to hold these shares, you would one day recover your costs. However, the cost of holding or blockage of funds in the meantime could be a factor. On the other hand, there are innumerable examples, where a small cap or mid cap share has never, not even after years, has recovered to previous high level.

Should you invest in mid cap shares?

If you must invest in mid cap share, invest through a mutual fund. The beauty of investing in mid-cap companies through mutual funds is that you can become a part of the success of well-positioned companies selected by professional fund managers and can thus achieve superior investment returns. After all, Infosys, Satyam, Bharti were all mid-cap companies in their initial years and today they are pioneers in their respective industries.

A top-performing mid-cap fund may garner annual returns of as high as 10-15 times more than large-cap funds. However, equal are the chances of you ending up with major erosion in the value of your investments owing to the high risks involved with investing in mid-cap companies.

Investing in mid-cap oriented funds should be done with a time horizon of at least 3 years, preferably more than 5 years. The same also holds true for large caps if you want to see a significant appreciation in the value of your portfolio.