Union Budget 2019: Mid-cap funds bear high-risk factors, offer high returns; small caps can be volatile

Mutual funds diversify investments between mid and small-cap companies and are termed as mid and small cap funds.

A mid-cap fund is a type of investment fund which focuses its investments on companies with a capitalisation in the middle range of stocks in the investable market.

The opportunity for investment in mid-cap funds is high due to the low identification factor in the market. Another important feature of these mid-cap funds is that they tend to grow in size as more investors get involved. The net effect is that a huge amount of money is invested against a few stocks.

A small-cap fund is a type of equity mutual fund which invests a majority of its assets in the stocks of small-cap companies (companies which rank 251st and more in terms of market capitalisation). Nearly 95 percent of all India listed companies are small cap companies.

Small-cap funds can be volatile because they invest in companies that are less stable than large-cap companies.

In general, companies with market capitalisation up to Rs 500 crore are termed as small and companies with a market capitalisation over Rs  500 crore, but below Rs 1,000 crore are defined as medium-sized firms by the mutual fund industry. Mid-cap funds bear high-risk factors and thus offer high returns in case of positive movements of the indexes.