Which Mutual Fund Market Cap Suits You ? Different Funds, Different Market Caps

Which Mutual Fund Market Cap Suits You?

As a general rule, small-cap and mid-cap funds have outperformed large-cap funds, and the trend is not likely to change anytime soon. As a result, prospective investors need to have a strong understanding of market capitalization ("market cap") in order to effectively begin their search for mutual funds. 

Here we explain the differences between the various types of funds and look at the kinds of returns you can reasonably expect from them based on historical data.

Different Funds, Different Market Caps

When a mutual fund is described in terms of market cap (i.e., small cap, mid cap or large cap), it indicates the size of the companies in which the fund invests, not the size of the mutual fund itself. 

Market cap is calculated as the number of shares outstanding multiplied by the current market price of one share. Thus, a company with one million shares outstanding selling at $100 per share would have a market cap of $100 million.

Small-Cap Funds

Small-cap funds typically include companies with market capitalization of less than $1 billion (bear in mind that these numbers are only approximations that change over time, and the exact definition of these categories can also vary between brokerage houses). 

Generally speaking, smaller companies are those in the early stages of business. They are presumed to have significant growth potential, but are not as financially strong or as established as larger companies.

Because small-cap funds invest in companies that are less stable than large-cap companies, the funds can be quite volatile. This has its advantages and disadvantages. In times of market instability, small-cap funds can suffer greatly as less-established companies go out of business. On the other hand, small-cap funds can also be great investments for those who can tolerate more risk and are looking for more aggressive growth. 

Investors hoping for aggressive returns will certainly want to park some money behind these funds. Finally, many mutual funds cannot take substantial positions in small-cap stocks without filing with the Securities and Exchange Commission (SEC), and this usually means greater transparency when it comes to the fund's holdings.

Mid-Cap Funds

The most popular choice among the general investing public, mid-cap funds are those that invest in companies with market caps of $1 billion to $8 billion. Mid-cap companies share some of the growth characteristics of small-cap companies, but they entail less risk (at least in theory) because they are slightly larger. 

You might say that mid-cap funds are to the mutual fund market what mid-size cars are to the automobile market. The mid cap is a compact vehicle for the market, falling somewhere between those sporty little small caps and the massive SUV type large caps.

Mid-cap funds don't always move with the broader market, and they are also usually not as prone to violent swings as small caps. Mid-cap funds can be great investment vehicles for investors seeking a fund with great return possibilities - without the risk of small caps - and index-related returns like those of large caps.

Large-Cap Funds

Large-cap funds comprise companies with market caps of $8 billion or more - the "big fish" of Wall Street. However, because of their enormous size, large-cap funds are often forced to imitate a larger index, such as the S&P 500. This is because mutual funds have restrictions on the level of ownership they can have in any one company, which is generally no more than 10% of their outstanding shares. 

This results in large-cap funds being forced to buy large companies - the same ones that make up the major market indexes.

Large-cap funds can be great for investors who have longer-term investment timelines and would like to "buy and hold". There are many large-cap income funds that are great income vehicles for those who want to take on less risk. But for those seeking greater diversification in smaller, more aggressive companies, large-cap funds probably aren't the answer.

Looking at Returns

Once you understand the fundamental differences among small-, mid- and large-cap funds, it's important to look at real world returns to get a clearer picture of what is right for you.

Breaking It Down

Why have small and mid caps been producing greater returns than large caps in recent years? Generally speaking, small and mid-cap companies have the ability to produce greater returns through more agile and dynamic businesses that tend to be more growth oriented than larger conglomerates. 

Simply put, a company with a $1 billion market cap can much more easily double its entire market cap than a large conglomerate of $50 billion. And because share price is an important factor in measuring market cap, a rapidly growing market cap most often translates to the price of the stock climbing higher as well.

Of course, there will always be examples that buck the trend, but overall, the numbers show that small- and mid-cap funds are goods bets for higher returns.

Example

Consider this analogy: the small grocery store on the corner of your street is probably able to switch its products much more quickly than a mega-chain like Walmart, right? Although smaller companies may not have the same price influence as larger companies, they can tailor their products to a more specific audience to produce significant location and client-specific returns. Large-cap funds invest in larger companies, while small-cap funds take stakes in smaller, more sector-specific securities. So, 

when you invest in small-cap funds, it\'s like you have the opportunity to invest in 100 successful corner stores instead of a mega-company like Walmart.

Also keep in mind that when fund managers invest in smaller companies, they work very hard to ensure that the small and mid-cap companies are financially sound and have healthy management teams.

The Bottom Line

When you consider what type of mutual fund is right for your portfolio, it's crucial that you remember that there are many other factors to consider, including whether the fund specializes in growth, value or another investing style. What's more, you have to be able to distinguish between load or no-load funds, and determine whether you prefer open or closed-end funds.

As always, you need to do your homework and research the funds in which you are investing - mutual fund companies have been known to roll their bad funds into better performing funds. 

Understanding the pros and cons of the various market cap funds is a good first step to determining which funds best suit your portfolio and your investment style, but a savvy investor knows that his or her work is never done.

Few Good Medical Insurance Policies in India

Few Good Medical Insurance Policies in India

Before glancing at the list of few good medical insurance policies, it is suggested that you understand what health insurance means. A type of insurance that covers medical and surgical expenses those are incurred by the insured. Health insurance either reimburses the insured for costs incurred from illness or injury or pays the care provider directly.

Mentioned below is the list of few Good medical insurance policies provided by the leading Indian Health insurers:

Star Health & Allied Insurance Company Limited

Star Family Health Optima Insurance Plan (Family Floater) (2 adults+2 children)

What is Mediclaim ? What is health insurance ? Mediclaim vs Health Insurance

How is a health insurance plan different from mediclaim policy?

Lot of individuals subscribe to mediclaim policies in the belief that they have adequate health insurance to address all health issues. This is not only inaccurate but might just prove a very costly oversight.

To be sure, mediclaim although a form of health insurance is far from adequate to cover the many illnesses and health conditions that have become so common given the stress and mishaps in everyday life.

Mediclaim

First let’s understand what mediclaim brings to the table.

Different Types of Mutual Funds

Different Types of Mutual Funds 

As a first time investor, it can be a daunting task to select the right type of mutual fund to invest in. The first step to accomplishing this is to have an investment objective. That in itself is a dilemma as you will now be thinking about how you should determine an investment objective when investing in mutual funds.

An investment objective can be simply defined as what you expect to achieve from a mutual fund investment in terms of growth and dividends. This objective is based on parameters like the investment term and your risk taking appetite.

Mutual Fund related terms that you should know

Assets: These are the market instruments like stocks, bonds etc. that a mutual fund invests in.

How to open a DEMAT Account ? What is 3 in 1 Account ?

The growth which our economy has seen in the last few decades has been commendable. And with growth in the Economy, the disposable income of people has also increased. With higher salaries, people now want to invest in Stock Markets and a question most of the Potential Investors are asking is How to Open a Demat Account and Online Share Trading Account?

How to Open a Demat Account?

1.      The first and foremost step is to approach DP or depository participant

What’s The Difference Between a Stock, Bond and Mutual Fund ?

A stock is ownership in a company.  When you buy a stock, you buy a piece of the company.  So if the company does well, you do well.  Congruently, if the company tanks, your stock tanks.  Just like bonds, there are many types of stocks because there are many different types of companies out there.   Large company stocks (large cap), mid cap stock, small cap stock, international stock, emerging stock, tech stock, etc.   Historically, stocks have an annual average return of 10.8%.

However, remember that with more return comes more risk.  So when investing in stocks, keep in mind that you have to be able to handle the extra risk or volatility to reap the potential reward in the long run. 

Using the Rule of 72, if you have $5,000 in stocks that average 10% return overtime, it will take you 7.2 years to double your original investment to $10,000.  By the end of 36 years you will have potentially $160,000.  Compare that to the $10,000 you will have after 36 years if you leave your money in just cash investments.  Now you can start to see why taking on the extra risk can become worth it in the long run.

How to Invest in Mutual Funds ?

Ten years ago if you had started investing Rs 1,000 every month in funds such as HDFC Top 200 or DSP BlackRock Equity, you would have seen your investment (Rs 1,20,000) growing over 6-7 times by now. Both the funds have given around 30% annualised return over the past 10 years.

There are close to 60 such equity schemes that have given over 20% annualised return in the last 10 years. If only you had invested regularly in any one of them, you could have made big money over the years.

In hindsight, it sounds easy to choose one of these funds and keep investing in them for as long as 10 years to reap the benefits. However, the toughest part in making an investment decision is selecting the right product be it mutual fund schemes, stocks or commodities.

Besides, there is danger in choosing a product purely based on its past performance without giving much thought to other factors such as charges, downside risk, consistency of performance et al. Mutual fund investors often make the mistake, egged by unscrupulous financial advisors, of latching on to a mutual fund scheme that has given very high returns in very short time.

Based on the investment plan, the category of funds should be chosen from debt, equity or hybrid

What is ETF ?

Exchange Traded Funds

ETFs have several similarities to mutual funds. Like a Mutual Fund, an ETF is a pool or basket of investments. However, ETF’s many times have lower expenses then a similar mutual fund in that there are no loads and the operating expenses are often lower. FINRA posted the following comparison of expenses on its website.

Fund Type           Average Total TOT -0.39% Operating Expenses

Mutual Funds    ETFs

US Large-Cap Stock         1.31%    0.47%

US Mid-Cap Stock            1.45%    0.56%

US Small-Cap Stock         1.53%    0.52%

International Stock         1.57%    0.56%

Taxable Bond    1.07%    0.30%

Municipal Bond                1.06%    0.23%

Another primary difference is that an ETF doesn’t trade

DEMAT ? What is DEMAT account ? How to open DEMAT Account ?

Demat account is necessary for investing in mutual funds?

All about MUTUAL Funds

If you are considering mutual fund investments and do not know much about mutual funds here we will give you a comprehensive overview about mutual fund investment. There are many investors who are often in confusion whether they need a demat account to invest in the mutual funds. The answer is “No”.

 You do not need a demat account to invest in mutual funds or sell the units that you have purchased. But of course if you have a demat account you can surely make use of it for investing in mutual funds. But then you might be wondering how to invest in the mutual funds?

How mutual funds operate – Mutual funds are managed by financial institutions, which collect money from the market from retail investors by selling units of the funds through open advertisements at a specific price. Then they invest the collected money

How to open a company ? What are the types of companies which can be opened in India ?

Understanding Partnership Businesses

When one is starting a business, one may form a sole proprietorship when the business is small. The problem with this kind of business is that it cannot grow beyond a certain limit. This is because a sole proprietorship will not be readily sponsored by banks other sources of finance.

Also the amount of money that the sole proprietor can contribute to the business “alone” is not very high. Besides this, the sole proprietor has to take wise decisions in running the business. If he is unable to do so, the business will not be very successful and will not grow.

A sole proprietor might be an expert at marketing or might be technically strong. But it is not likely that he will be strong in all the fields that are important for making wise and successful business decisions.

For all the above reasons, one may choose to form a partnership firm right from the start or later change their firm to a partnership firm. So, one may start a partnership firm with the objective of pulling in people so that more capital is generated or making specifically skilled people partners so that wise business decisions may be made.

What is EBITDA ?

An approximate measure of a company's operating cash flow based on data from the company's income statement. Calculated by looking at earnings before the deduction of interest expenses, taxes, depreciation, and amortization. The formula is:

EBITDA = Revenue – Expenses (excluding interest, taxes, depreciation and amortization)

This earnings measure is of particular interest in cases where companies have large amounts of fixed assets which are subject to heavy depreciation charges (such as manufacturing companies) or in the case where a company has a large amount of acquired intangible assets on its books and is thus subject to large amortization charges (such as a company that has purchased a brand or a company that has recently made a large acquisition). Since the distortionary accounting and financing effects on company earnings do not factor into EBITDA, it is a good way of comparing companies within and across industries. This measure is also of interest to a company's creditors, since EBITDA is essentially the income that a company has free for interest payments.

In general, EBITDA is a useful measure only for large companies with significant assets, and/or for companies with a significant amount of debt financing. It is rarely a useful measure for evaluating a small company with no significant loans.

Earnings Before Interest, Taxes, Depreciation and Amortization - EBITDA

An indicator of a company's financial performance which is calculated in the following EBITDA calculation:

EBITDA is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.

This is a non-GAAP measure that allows a greater amount of discretion as to what is (and is not) included in the calculation. This also means that companies often change the items included in their EBITDA calculation from one reporting period to the next.