Investing in Mutual Funds: Cap Sizes

When it comes to investing in mutual funds, it helps to have an idea of how it works. Mutual funds are categorized in several different ways, and one of those main ways is according to market capitalization. This is also called cap size. Mutual fund cap sizes can help you formulate an investing strategy for your mutual funds.

Large cap funds

Large cap mutual funds invest in companies that have market values that exceed $8 billion. For the most part, large cap funds are the least volatile of mutual funds. You can choose such large funds as the Vanguard 500 Index or the Magellan fund from Fidelity. Returns are generally smallish, since these are more stable funds. One good large cap mutual fund can be a good way to set up the core of your long-term investment holdings.

Mid cap funds

The mutual fund cap size that is in the "middle" are the mid cap funds. Mid cap funds range from about $1 billion to $8 billion as far as the companies' market values are concerned. While mid cap funds grow at a faster pace and with more volatility than large cap funds, their short-term returns are still smaller than many small cap funds (although larger than short-term large cap funds). These can be a good way to add a little diversity to your investment portfolio.

Small cap funds

Small cap funds, consisting of companies with market capitalization of less than $1 billion, represent the biggest chance of large short-term returns. However, they are also the most volatile, and can be overvalue, as they are often rated on the potential for future growth. These are best for short-term gains in your investment portfolio, if you have enough risk tolerance for it, and if you have enough time for your investment holdings to recover from any losses.

Overall, it is worth noting that large cap funds normally outperform all other mutual funds in the long term.