What is Market capitalization ? How does it affect investment decisions in Mutual Funds and stocks ?
Market Capitalization is the total rupee value of shares of a company traded on National Stock Exchange or Bombay stock exchange.
Its calculated by multiplying the number of shares on the exchange and the current market price of the share.
Based on their Market Cap ( i.e. capitalization) they can be classified into Large cap, Mid cap and Small cap stocks.
Mutual Funds build their portfolios around this. There are Largecap Funds, Midcap Funds, Small cap funds or a combination of all three. (Multicap, large and mid )
Large caps are stocks between 8 lakh crore and 28 thousand crore some of them being Reliance, TCS, HDFC Bank.
These funds/stocks generally tend to face economic slowdowns better due to their legacy and established processes.
With lower risk, returns aren’t high in the short run but can be wealth creators for investors in the long run due to their stability.
Midcap are stocks between 27 thousand crore and 8 thousand crore. These are companies that aren’t as big as the large caps but have shown rapid growth in expanding their business and network and show potential of being the next large cap company. They carry higher risk than large caps and hence the return and downfall potential is higher.
Small caps are stocks below 8 thousand crore. They are companies which are new or aren’t has well established as other industry players. Though they have growth potential in earnings and profit, economic slowdown, local taxes and policies and a lot of other factors can turn the company bust or make a dent so wide that it becomes difficult to grow again. That being said they command superior returns and superior risk. Small cap mutual funds for long term make sense retail investors as this segment requires greater analysis and professional expertise.
You can view the market data at https://www.amfiindia.com/research-information/other-data/categorization-of-stocks
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