Which market cap suits you best; Large cap, mid cap or small cap? (2024)

FAQs

Which market cap suits you best; Large cap, mid cap or small cap? ›

If she is a conservative investor and is unwilling to take on much risk, then large caps are advisable. She must only consider investing in mid and small caps if she is willing to take high risk to earn higher returns and has a longer investment horizon, so as not to be tormented with the short-term volatility.

Large-cap funds prioritise stability with lower risk, ideal for conservative investors. Mid-cap funds offer a balance, providing growth potential with moderate risk. Small-cap funds hold the allure of potentially high returns, but come with the most significant risk.

If you have a greater risk tolerance and longer time horizons, small-cap stocks tend to outperform big-caps over time because they are able to grow more rapidly than larger companies. If you prefer stable appreciation and dividend income, big-caps may be more suitable.

Small-cap stocks and large-cap stocks both come with their own pros and cons. While small-cap stocks can generate higher returns, they also have a higher risk profile. Conversely, large-cap stocks witness smaller growth but are more stable. Investors should consider investing in both for a balanced portfolio.

Large caps are considered safer than small caps and have performed well over time.

Flexi cap schemes are typically recommended to moderate investors to create wealth over a long period of time. Ideally, one should invest in these schemes with an investment horizon of five to seven years. As said earlier, these schemes have the freedom to invest anywhere depending on the view of the fund manager.

Mid-cap stocks generally fall between large caps and small caps on the risk/return spectrum. Mid caps may offer more growth potential than large caps, and possibly less risk than small caps. Small-cap stocks tend to be, on average, least developed publicly traded companies, although there are exceptions.

The S&P 500 and NASDAQ 100 outperformed small caps (Solactive 2000) by more than 16% and 18%, respectively. Since the midpoint, however, the tables have turned. Small caps have rallied over 9% compared to just over 2% for the S&P 500, and less than 1% for the NASDAQ 100.

Mid-caps are slightly riskier than large-cap stocks and less risky than small-cap stocks. Small-cap stocks are riskier than the other two. Despite the risk, these stocks have great growth potential. Large-cap funds are usually less volatile unless there is some news.

In July 2024, U.S. small-cap stocks outperformed large-cap stocks after lagging for the first half of the year, driven by a cooler inflation report and improved market sentiment.

How much of my portfolio should be in small-cap stocks? ›

However, it is essential to understand the risks involved and not be overly optimistic. Prudent investors should consider rebalancing their smallcap allocation to lower levels, limiting it to 25-30% of their equity exposure.

From an emotional perspective this feels like a logical investment strategy. The data on investment returns, however, suggests quite the opposite. Investing in small caps during recessions has generated superior investment returns, according to our back-testing of the data to the late 1980s (see Table 1, below).

This is relative: A "good" market cap will align with your goals for your portfolio. Large-cap companies tend to be more stable and carry less risk than small-cap companies. And while small-cap companies may carry more risk, they can offer big rewards if they experience significant growth.

Historically, small cap stocks have generated higher returns than their larger peers over extended periods. That's because smaller businesses are earlier in their maturation and have more room to grow than larger companies.

High risk: While small-cap companies have a lot of growth potential, they have equal potential to fail. Small-cap stocks are a riskier investment than large-cap stocks. The companies usually have less access to investment capital and are more sensitive to market changes. This makes them a riskier investment.

One is that, when it comes to trading, small-cap stocks have less liquidity. 3 For investors, this means enough shares at the right price may be unavailable when they wish to buy—or it may be difficult to sell shares quickly at favorable prices.

Mid-Cap Stocks Have a Track Record of Outperformance

Mid-cap stocks have a historical pattern of outperformance compared to large- and small-cap stocks. It becomes clear when we analyze rolling five-year performance snapshots, which typically capture rising and falling stock market environments.

They look at returns from 1926-2021. Small cap stocks outperformed large cap stocks 11.99% to 10.35%. But basically all of that premium came in one nine year window between 1975 and 1983 when small cap stocks were up more than 1,400% in total. Small caps outperformed large caps 35.3% to 15.7% per year in that time.

Investing in small caps during recessions has generated superior investment returns, according to our back-testing of the data to the late 1980s (see Table 1, below).

Investors who prefer diversification across different market capitalisations, including large cap, mid cap, and small cap stocks, can benefit from multicap funds. These funds offer exposure to a broad spectrum of companies, which can help spread risk across different sectors and market segments.