Large Cap Vs Mid Cap – Better Growth Potential

In financial markets, it is important for investors to analyse companies from different perspectives to develop a holistic understanding of their businesses and their fundamentals. Market capitalisation is one such perspective that plays a significant role in analysing companies.

It is calculated by multiplying the current market price by the number of outstanding shares of the company. Based on market cap, companies are broadly classified into three categories: large cap, mid cap, and small cap.

Table of contents

• Key characteristics of large cap companies
• Key characteristics of mid cap companies
• Mid cap vs large cap: Risk and return comparison
• Growth potential in mid cap vs. large cap companies
• Market volatility and stability factors
• Which category suits different types of investors?

Key characteristics of large cap companies

Companies that rank in the top 100 in terms of market capitalisation are called large cap companies.

Listed below are certain common traits of large caps.

• They generally have robust cash flows with strong financials, capable of withstanding bear markets and potentially generating relatively stable returns during recessionary time periods.
• They are well-known companies, and most of them have a large market share in their field.

Investors and mutual fund companies see them as relatively stable investments as they have a proven track record, a range of diversified investments, and robust management strategies. Past performance may or may not be sustained in future

Also Read: What are Large and Mid Cap Funds?

Key characteristics of mid cap companies

Considering market capitalisation as the financial metric, mid cap companies rank from 101 to 250 on the stock exchange.

Some of their key traits are listed below.

• These companies have not yet reached the market presence of their large cap counterparts. However, they have room to potentially scale up and innovate.
• The growth potential of mid cap companies is often higher when compared to large caps, but at the expense of higher risk and sensitivity to market corrections.
• Mid cap companies may potentially lead to higher capital appreciation in the long run and are therefore preferred by investors with a high risk appetite who seek to beat the category average.

Mid cap vs large cap: Risk and return comparison

• Large cap companies have already built strong roots in their industries and are already generating cash flows that may be consistent and predictable. Therefore, they offer a relatively low-risk option with stable return potential and continued performance in all kinds of market situations. However, mid cap companies are in the intermediate business phase have some to establish their dominance in the market. This makes them risky compared to large caps, as they are subject to potentially bigger price swings during market shocks.
• Considering the potential for returns, mid cap companies offer relatively higher return potential for breakout profits and capital appreciation, especially over the medium to long term. On the other hand, large cap companies provide relatively lower but steady return potential, since they have already reached a certain size and offer limited room for growth.

Growth potential in mid cap vs. large cap companies

• Unless a particular sector is going through a major shift, large cap companies generally don’t show extraordinary growth potential figures, as they have foreseeable strategies for expansion and innovation. Additionally, they may often be slowed down due to their sheer size and may be slow to react to the evolving landscape.
• Mid cap companies offer relatively higher potential for growth due to their ability to be agile. These companies are equipped to potentially capitalise on market shifts due to their leaner structures and greater focus on innovation.

Market volatility and stability factors

• During periods of market volatility, large cap companies may potentially withstand slowdowns and consumption slumps, owing to the consumer trust and diversification. This may potentially lead to stable cash flows and limited price movements, thus avoiding panic among investors.
• Conversely, mid cap companies tend to face steeper price corrections and more pronounced consumption shocks during precarious market conditions. However, if these companies may manoeuvre such situations, there are potentially higher chances of rebounds and benchmark-beating growth.

Which category suits different types of investors?

• Investment in large cap companies may be suitable for investors aiming for relative stability and modest returns. Large cap companies may be suitable for investors who prioritise preservation of capital, especially when markets are facing regular fluctuations.
• Investors who seek aggressive returns and have a higher risk tolerance may consider mid cap companies.
• Additionally, investing in a combination of large cap and mid cap firms may also help investors to balance their overall risk/return potential profile.

Also Read: Is Large and Mid Cap Funds Ideal for First-Time Investors?

Conclusion

When it comes to selecting companies for equity investing, it is imperative for investors to know the challenges and opportunities of all categories of companies. This may help them to make informed decisions aligned with their unique financial goals and risk appetite. Hence, it is important to understand how large cap companies may offer relative stability but with moderate return potential, whereas mid cap firms may offer higher growth prospects with a higher risk of price fluctuations during market shifts.

FAQs

What are the main differences between mid cap and large cap companies?

Organizations ranking from 1 to 100 with respect to market capitalisation are categorized as large cap whereas those that rank 101 to 250 are categorised as mid cap companies.

Are mid cap companies riskier than large cap companies?

Yes. Mid cap companies tend to be riskier than large cap companies since they are not as well established and have a higher probability of price corrections during market slowdowns.

Can investors include both mid cap and large cap stocks in their portfolio?

Yes. Investors can include both mid cap and large cap companies in their portfolio. Allocating funds in both may help build a more diversified and well-balanced portfolio.

How do market conditions affect mid cap and large cap companies differently?

Typically, mid cap companies are impacted more than large caps when markets are bearish. This is because they often do not possess the financial backing or the consumer loyalty of large cap companies. On the contrary, during bull runs, mid cap firms have the potential for outperformance, whereas large caps would typically show muted appreciation in market prices.

Which category is better for long-term investment, mid cap or large cap?

Depending on the context, both mid cap and large cap companies may be suitable options over a long investment horizon. For a risk-averse investor looking for relatively stable potential returns coupled with some preservation of capital, large caps may be more suitable. However, aggressive investors with higher risk tolerance aiming for breakout growth potential may consider investing in mid cap companies.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.