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Funds: Equity Funds (Part 2)
How to choose between equity funds based on market capitalization
We have talked about the many different types of equity funds, and we’ve sifted through it generally. For this one, we’ll look into equity funds that are divided by market capitalization (market cap). Let’s take a quick recap. There are many major types of funds, which are divided as follows:
Under the branch of Equity funds itself, there are many ‘sub-types’ of funds which are:
We did explain generally what each of the above sub-branches of equity funds stands for, you can read it here.
It simply refers to the categorization of funds based on their strategy that only goes for companies within their market cap categories. For example, a large-cap fund would have most of its portfolio consisting of companies with a large market cap.
How large is large? Here’s how the market cap is grouped in the US:
Large-cap: Market value of $10 billion or more.
Mid-cap: Market value between $2 billion and $10 billion.
Small-cap: Market value between $250 million and $2 billion.
Micro-cap: Market value of less than $250 million.
Here’s how the funds are grouped:
Mind you, a fund of a certain size group would have 80% of its portfolio of that particular market cap stock. There would often be a few small percentages of the portfolio allocated in other market cap levels. For example, a large-cap fund wouldn’t be 100% large-cap, it can have 20% or less in, say, small-cap stocks.
It consists predominantly of companies with a market value of $10 billion or more. This could be of companies like Apple, Alphabet, Nvidia, and more.
This fund is particularly useful for people who want to see their money grow, but not too volatile. So, if you want to see your money grow alongside the market while still keeping your peace of mind, this would usually be the go-to choice.
Why is that the case? Large-cap companies are usually more stable, and they would gradually grow or inch lower, but it would often be nothing too significant.
It consists predominantly of companies with a market value of between $2 billion and $10 billion. This fund is particularly useful for people who want to see their money grow and take slightly more risk.
It would be more volatile than large-cap funds are, but not as volatile as small-cap and micro-cap ones.
It consists predominantly of companies with market value between $250 million and $2 billion. It would be more volatile than large-cap and mid-cap funds are, but less volatile than micro-cap.
This is the most volatile of them all. This type of fund is good if you’re seeking more risk (and more returns), while also saving yourself the trouble of having to do market research. Of course, you still have to do a bit of research to choose the best fund amongst the bunch.
This would be a fund that mixes different cap-level stocks into its portfolio, e.g. large-cap and mid-cap. The purpose of this is to increase/decrease the volatility of the portfolio, but not too much.
If you go for large-cap, the volatility might be low, while mid-cap might be too high for your liking. So, what do you do? Take a little bit of both.
Who is it good for?
Suitable for: Investors seeking stability and steady growth.
Why: Large-cap funds primarily invest in established companies with a market value of $10 billion or more. They are less volatile and can be ideal for those looking for gradual and reliable returns.
Suitable for: Investors willing to take on slightly more risk for higher growth potential.
Why: Mid-cap funds focus on companies with a market value between $2 billion and $10 billion. They offer a balance between stability and growth, making them suitable for those seeking moderate risk and returns.
Suitable for: Investors comfortable with higher volatility and seeking higher growth potential.
Why: Small-cap funds invest in companies with a market value between $250 million and $2 billion. They can be suitable for those willing to accept more risk in exchange for the potential for significant returns.
Suitable for: Risk-seeking investors looking for potentially higher returns.
Why: Micro-cap funds include companies with a market value of less than $250 million. They are the most volatile but may appeal to those seeking aggressive growth and are willing to tolerate increased risk.
Suitable for: Investors seeking a balanced portfolio with both stability and growth.
Why: Hybrid funds combine different cap-level stocks (e.g., large-cap and mid-cap) to provide a diversified approach. They are suitable for those looking to manage volatility while seeking a mix of stable returns and growth potential.
There are equity funds whose basic strategies are based on the size of the stocks’ market cap. It is divided into five main categories:
The suitability of each fund depends on an investor’s risk tolerance, investment goals, and preferences. Large-cap funds are more stable, mid-cap funds offer a balance, small-cap funds involve higher risk for potential higher returns, micro-cap funds are for aggressive growth seekers, and hybrid funds provide a mix of stability and growth.
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