What Investors Gain from Large, Mid & Small-Cap Growth Funds - Mutual Fund Commentary

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When capital appreciation over the long term takes precedence over dividend payouts, growth funds become a natural choice for investors. A single minded focus toward capital appreciation is what best characterizes growth funds. These funds focus on realizing an appreciable amount of capital growth by investing in stocks of firms whose value is projected to rise over the long term.

However, a relatively higher tolerance to risk and the willingness to park funds for the longer term are necessary when investing in these securities. This is because they may experience relatively more fluctuations than other fund classes. Nonetheless, in depth research and professional management are what make mutual funds a much safer proposition as compared to directly investing in growth stocks.

The growth funds can be divided into three segments depending on their market capitalizations. Thus, investors get to choose from Large cap, Mid cap or Small cap funds. This choice can be made depending on what suits the investor the most. For a better clarity, let's take a look at what each of these market capitalizations suggest and then compare their returns.

Market Capitalization

Simply, market capitalization of a company is calculated by multiplying the shares outstanding with the market value of each share. The result will give us the market cap, and will decide if the company can be categorized under large cap, mid cap or small cap.

Generally, companies with more than $10 billion market cap are considered a large-cap firm. Mid-cap companies have market capitalization within $2-$10 billion. A small-cap company is one that has market capitalization below $2 billion.

However market capitalization in case of funds does not reflect the size of the fund's assets. Instead, it is an indication on what type of securities the fund invests in.

Large-Cap Funds: A large-cap fund will invest in large-cap companies, i.e., those having market cap above $10 billion. These funds provide the least amount of risk. Most often, the large cap funds tend to duplicate the benchmarks - like S&P 500. These funds are ideal for investors with long-term investment timeline.

Mid-Cap Funds: These funds invest in companies generally having market capitalization within $2-$10 billion. These funds are riskier than large-cap funds but are less risky than small-cap funds. Mid-cap funds are not very susceptible to volatility in broader markets. These are ideal investment options for investors looking for high return potential that comes with lower risk than small-cap funds.

Small-Cap Funds: Small-cap funds generally invest in companies having market cap lower than $2 billion. The companies, smaller in size, offer growth potential and their market capitalization may increase subsequently. Small-cap funds are believed to have higher growth potential. Small-cap funds are a good choice for investors seeking diversification across different sectors and companies. Investors with a high risk appetite should invest in these funds. (Read: Small-Cap Funds Giving High Returns )

Performance of Various Market Caps

Small-cap and mid-cap funds generally outperform large-cap funds. This is true as we already discussed that small-cap funds offer larger growth potential and large-cap funds are generally long-term investments. However this year, large-cap funds have been performing well. Large-caps have in fact outperformed small-caps this year and over the last one-year period.

If we look at the returns, the mid and large-cap seem to be the best bets in terms of return.

Market Cap

   Index

Returns (in % as of Aug 20)


YTD 1 Year 2 Years 5 Years
Small Cap

Russell 2000 (RUT)

-0.1 13.5 41.8 NA

Russell 2000 Growth (RUO)

1.8 14.6 45.5 124.7

Morningstar Small Cap Index (MSCP)

2.6 15.8 44.4 120.3

Morningstar Small Growth Index (MSGR)

-1.2 13.1 42.3 127.1

Mid Cap

Russell Midcap (RMCC)

7.9 20.3 48.4 NA

Russell Midcap Growth (RMCCG)

6.5 19.8 46.9 62.4

Morningstar Mid Cap Index (MMCP)

7.7 20.6 49.7 127.2

Morningstar Mid Growth Index (MMGR)

6 19.5 44.5 131.1

Large Cap

Russell 1000 (RUI)

7.3 20 41.5 NA

Dow Jones U.S. Large-Cap Growth Index (DJUSGL)

8.4 25.4 38 106.1

Morningstar Large Cap Index (MLCP)

7.1 19.6 38.4 93.2

Morningstar Large Growth Index (MLGR)

9.6 27.2 40.9 118
Return % calculated using Google Finance

Growth Funds to Buy

For investors looking to invest in growth funds, we will suggest here the top growth funds from each market capitalization.

These funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) as we expect the funds to outperform its peers in the future.

Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

These funds are also among the top gainers for this year so far.

Large-Cap Growth Fund

ClearBridge Aggressive Growth A (SHRAX) invests in growth companies that may, or, are already witnessing earnings growth higher than that of firms in the S&P 500 Index. It invests in prominent and large companies whose earnings are expected to accelerate in the long run.

The fund has returned 12.7% year to date. Top holdings of the fund include Biogen Idec Inc (BIIB), UnitedHealth Group Inc (UNH) and Forest Laboratories Inc.

Mid-Cap Growth Fund

Rydex Series Trust Mid-Cap Advantage A (RYAHX) seeks to provide 150% of the return of the daily performance of the S&P MidCap 400 Index. The fund invests most of its assets in mid-cap companies, or the ones with market cap range of the S&P MidCap 400 Index.

The fund has returned 7.5% year to date. Top holdings of the fund include Equinix Inc (EQIX), United Rentals Inc (URI) and SL Green Realty Corp (SLG).

Small-Cap Growth Fund

BlackRock Global SmallCap Investor A (MDGCX) seeks capital appreciation over the long term. The fund invests a large share of its assets in small cap equity securities. The issuers of these securities must be identical to firms included in the MSCI World Small Cap Index. The fund also invests in foreign securities, including ones from emerging countries.

The fund has returned 5.6% year to date. Top holdings of the fund include Vestas Wind Systems A/S (VWS), Africa Oil Corp and Pitney Bowes Inc (PBI).

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank in our  Mutual Fund Center .


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BIOGEN IDEC INC (BIIB): Free Stock Analysis Report

UNITEDHEALTH GP (UNH): Free Stock Analysis Report

EQUINIX INC (EQIX): Free Stock Analysis Report

UTD RENTALS INC (URI): Free Stock Analysis Report

SL GREEN REALTY (SLG): Free Stock Analysis Report

PITNEY BOWES IN (PBI): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Mutual Funds

Referenced Stocks: RUT , RUI , SHRAX , BIIB , UNH

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