Nathan Bacal Financial

What are large cap and small cap mutual funds?

Stocks are usually grouped into categories based on the size of the company that you are investing in, namely big or small. The terminology “size” in this instance refers to the value of the company on the stock market. This is basically calculated by multiplying the company’s number of outstanding shares by the current purchase price of those shares. This is normally referred to as “market capitalization” or the “cap” size.

Typically, the larger companies are less risky to invest in whereas the smaller ones involve considerably more investment risks. However, the smaller firms usually provide you with a greater growth potential. The best recommendation is to diversify your portfolio in order to balance it out and minimize the investment risk factor. It is best to employ a combination of large, mid-sized, and small cap mutual funds.

Large-cap funds

The standard norm for large capitalization funds is that they are invested in companies that have a market value of $8 billion or greater. Large-cap funds are considerably less volatile than small-cap funds invested in smaller companies. Additonally, you should always anticipate smaller returns on your investments when you purchase small-cap funds. Despite the market tanking in late 2008, large-cap funds still outperformed all the other mutual funds out there. Although this is not always a hard and fast rule, most investors prefer large-cap funds to be the core of their investment portfolios.

Small-cap funds

Small-cap funds usually focus on investing in those smaller companies that have a market value of $1 billion or less. It is the level of investment aggressiveness displayed by the fund’s manager which determines the volatility of a small-cap fund. Most of the time, the more aggressive small-cap mutual fund managers will purchase funds of both hot-growth and technology companies.

Higher risks are taken by the aggressive fund managers because they anticipate higher rewards as a result of that increased risk factor. Conversely, those fund managers that are more conservative in their investment strategies will look for specific companies that the stock market has recently beaten down in value.

Despite the fact that hot growth funds are considerably riskier than value funds, the latter is just as subject to market volatility as the former is. Additionally, and due to this volatility factor, most small-cap funds insist that you hold onto them for the long-term in order to offset the potential for short-term losses. While large-cap funds have taken center stage in the investment theater due to market volatility, small-cap funds have become unstable.

Despite all of the above, you should by no means abandon the idea of investing in either large-cap or small-cap mutual funds in order to diversify your investment portfolio. History always repeats itself, and if that holds true, then small-cap mutual funds will once again be viewed in a favorable light because the stock market has always settled down after encountering an unstable period.

We’ve all had it drummed in our heads by now: Investing in the stock market is high-risk, high-reward. As you get closer to retirement age, it’s time to take your money out of the market and into safer vehicles.

This all makes sense. But, is the stock market really that risky of an investment?

Yes, the market crashed during the Great Recession. But today it’s back on the upswing. In early April, the Dow Jones Industrial Average rose past 11,000 for the first time in a year. In other words, stocks have made it through the Great Recession and are in recovery mode.

If you invested in the stock market right before the Great Recession, then, you’re likely seeing your investments start to rise again. If you were patient, and if you didn’t sell your shares when times were bad, you should be in line again to make a nice profit.

Consider another popular investment: residential real estate. Financial analysts have long called this a safe investment. That’s because historically, home values in the United States have risen. But look at what happened during the recession. Home values plummeted, even in some of the strongest residential real estate markets in the country.

Housing experts, though, say that real estate investors should not panic. They just have to be patient. If investors hold onto their real estate for five years, seven years or more, they should see their investment pay off. When they sell, they should make a solid profit.

This isn’t much different, then, than what investors should do when putting their money into the stock market. Patience, again, is the key. Investors who hold out the slumps can usually find a time to sell in which they’ll make a solid profit from the investments in the stock market.

Doesn’t this, then, make investing in the stock market a relatively safe investment? Yes, it does require some financial savvy. You have to make sure that you sell at the right times. But if you have enough time before retirement, and if you’re willing to hold onto your shares through the inevitable down times in the market, you should be able to realize a solid profit by investing in stocks.

Talk with your financial advisor when you’re considering investing in the stock market. One worth the fee you’re paying will guide you to stocks with which you’ll be most comfortable. Don’t consider the stock market to necessarily be a risky investment.