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Retail investors often diversify across large-cap, mid-cap, and small-cap stocks to manage risk and optimise potential returns. Each category has distinct characteristics, risks, and performance potential. Understanding these is crucial, especially for beginners, to align investments with goals and risk tolerance.
Market capitalisation (market cap) refers to the total value of all a company's shares combined.
It is calculated using the formula:
Market Capitalisation = Current Market Price × Number of Outstanding Shares
This metric helps categorise companies into large-cap, mid-cap, or small-cap groups. The categorisation is dynamic and is reviewed periodically by SEBI (Securities and Exchange Board of India) in India.
SEBI has issued specific definitions to bring standardisation across the industry.
Category |
Description |
Market Rank (by capitalisation) |
|---|---|---|
Large Cap |
Top 100 companies |
Rank 1 to 100 |
Mid Cap |
Next 150 companies |
Rank 101 to 250 |
Small Cap |
Companies beyond rank 250 |
Rank 251 and above |
This classification ensures transparency and uniformity in mutual fund categorisation, stock indices, and risk assessments.
Large cap companies are typically industry leaders with stable earnings and consistent performance.
Market leaders with strong brand recognition
Stable revenue and dividend history
Lower volatility compared to mid- and small-cap stocks
Widely tracked and followed by analysts
High liquidity and market coverage
Some of the well-known large-cap stocks in India include:
Reliance Industries
HDFC Bank
Infosys
TCS
ICICI Bank
These companies are generally considered to have a solid reputation and relatively lower risk in turbulent markets.
Mid cap companies represent the next tier of firms that have growth potential and rising market share.
Moderate growth trajectory
Less stable than large caps but more so than small caps
Potential for higher returns
Increasing investor interest and analyst coverage
Moderate liquidity
Mid caps can be an attractive proposition for investors looking for a balance between growth and stability.
Page Industries
Tata Elxsi
Balkrishna Industries
AU Small Finance Bank
While not as stable as large caps, these companies often represent growth-stage firms that are scaling up.
These companies are smaller in terms of revenue and valuation but can offer high growth potential.
High growth potential
Volatility is significantly higher
Vulnerable to market downturns
Limited analyst coverage
Lower liquidity compared to large and mid caps
They are ideal for high-risk investors with a long-term horizon and a higher risk appetite.
Tanla Platforms
IndiaMART InterMESH
Mazagon Dock Shipbuilders
Route Mobile
These firms may outperform in bull markets but also tend to fall sharply during corrections.
Returns may differ depending on market cycles, economic phases, and sector trends.
Time Period |
Large Cap |
Mid Cap |
Small Cap |
|---|---|---|---|
5-Year CAGR (approx.) |
11–13% |
13–15% |
15–18% |
Volatility |
Low |
Moderate |
High |
Liquidity |
High |
Moderate |
Low |
(Data based on average fund category returns as per AMFI, July 2025)
Understanding risk and reward across the three categories helps in setting realistic expectations.
Large Cap: Low risk, moderate returns, steady dividends
Mid Cap: Moderate risk, potential for high returns
Small Cap: High risk, high return potential, long-term focus needed
Market timing and sector rotation also impact performance, and investors must be patient during downturns.
Allocating investments across large, mid, and small caps can help achieve better diversification.
A typical investment strategy for new investors may include:
50–60% in large caps for stability
20–30% in mid caps for moderate growth
10–20% in small caps for long-term potential
This proportion can change depending on risk appetite, investment horizon, and market cycle.
Mutual funds use the same SEBI-defined classification to build portfolios.
Large Cap Funds: Invest minimum 80% in large caps
Mid Cap Funds: Invest minimum 65% in mid caps
Small Cap Funds: Invest minimum 65% in small caps
Multi Cap Funds: Invest across all three with flexible allocation
Investors who prefer professional management often choose such funds based on their financial goals.
Understanding large, mid, and small-cap stocks is crucial for a balanced portfolio. Large caps offer stability, while mid and small caps provide growth potential, though with higher volatility.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
These terms classify companies based on their market capitalisation—large cap being the largest, followed by mid and small caps.
Small caps carry higher risk due to volatility and limited liquidity, but they may offer better returns in the long run if chosen carefully.
Historically, mid caps have delivered better returns than large caps during bullish phases, but they can also fall more in bearish markets.
SEBI reviews market capitalisation rankings periodically, usually twice a year, to update classifications.
Neither is better universally—it depends on the investor’s goals, risk tolerance, and market conditions. A balanced mix is often recommended.
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