Market capitalisation (market cap) is a way to measure the size of a listed company. It is calculated by multiplying the current share price by the total number of shares outstanding. In India, SEBI uses market cap to categorise stocks into three groups: large-cap, mid-cap, and small-cap. These categories are widely used by investors and mutual funds to understand a stock's size, liquidity, and the kind of volatility it may carry.
What is market capitalisation?
Market cap = Share price x Total shares outstanding
For example, if a company has 100 shares and each share trades at Rs. 20, its market cap is Rs. 2,000. This is the market's current valuation of the company's equity, not necessarily a measure of its intrinsic value or the money flowing into the business.
Two things can change a company's market cap:
- The share price moves up or down.
- The number of shares changes, for example, through a fresh issue or a buyback.
How are large-cap, mid-cap, and small-cap defined in India?
Before 2017, there was no single standard for these categories in India. In October 2017, SEBI introduced a uniform framework for mutual fund scheme categories. Since then, mutual funds use AMFI's market-cap list, which ranks all listed companies by market cap and is updated periodically.
The ranking-based definitions are:
- Large-cap: Top 100 companies by market-cap rank
- Mid-cap: Companies ranked 101 to 250
- Small-cap: Companies ranked 251 and beyond
Because market caps change as stock prices move, companies can shift between categories over time. You can check which category a stock currently belongs to on Kite by tapping on the stock and selecting Fundamentals.
Why do small-caps move more than large-caps?
Stocks across these categories often behave differently in the market. Several factors explain this.
Liquidity and order-book depth
Large-cap stocks typically have more buyers and sellers active at any point. This means even large trades can be absorbed without the price moving too sharply. Small-cap stocks often have thinner order books, so a relatively smaller buy or sell order can move the price more significantly.
Free-float
Free-float refers to the number of shares actually available for trading in the market, excluding shares held by promoters and other locked-in investors. Some small-cap stocks have a low free-float, which reduces market depth and can lead to sharper price swings on lower volumes.
Analyst coverage and information
Large-cap companies are closely tracked by analysts, institutions, and financial media. News and updates tend to get priced in relatively quickly. Small-cap stocks often receive less coverage, which can mean that when significant news arrives, prices adjust in larger, less smooth steps.
Business concentration
Large companies typically have diversified revenue streams across products, geographies, and clients. Smaller companies may depend heavily on a single product, a few clients, or one expansion plan. A single event, such as a large order win, a regulation change, or a weak quarter, can therefore shift expectations more sharply.
Fund flows
When institutional money moves in or out of a market segment, large-caps can usually absorb it with less price impact. In small-caps, the same flow into a thinner market can cause larger price moves, especially when sentiment shifts quickly.
It is worth noting that higher volatility does not mean higher returns. It means the range of outcomes, both gains and losses, is wider. Risk management and time horizon matter when choosing between these segments.
How mutual funds use these categories
SEBI's framework requires mutual funds to follow defined allocation rules for category funds:
- Large-cap funds: Minimum 80% of assets in large-cap stocks (top 100 companies)
- Mid-cap funds: Minimum 65% of assets in mid-cap stocks (ranked 101 to 250)
- Small-cap funds: Minimum 65% of assets in small-cap stocks (ranked 251 and beyond)
Investors who want exposure across categories can consider:
- Flexi-cap funds: No fixed allocation across segments; the fund manager can shift between large, mid, and small caps depending on where they see value.
- Multi-cap funds: Defined minimum allocations across all three segments.
These rules can change over time, so it is always worth checking the latest scheme information document before investing.