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Small, Large and Mega Funds

Large-Cap, Mid-Cap, and Small-Cap Funds

In the world of mutual funds, cap is another word for capital or size of the company. Large-cap are the major corporations; small-cap are the smaller, often growing companies; and mid-cap are somewhere in between. Naturally, the larger, more established companies will present less risk and are, therefore, a safer investment. Small-cap stocks can take off and often have fared better (although not in 1998 and into 1999), but there is a greater risk since these companies are trying to establish themselves. While some small-caps have become huge quickly, others have moved along slowly or vanished into oblivion.

Small-caps can sometimes be deceiving because a company that starts out small and continues to grow is ultimately no longer a small-cap company. Yet it still may remain in the fund. After all, why throw out your ace pitcher even though he’s no longer a little league player? E-Trade was a small-cap company found in many small-cap funds, but as it grew and brought the funds high returns, fund managers enjoyed reaping the rewards (as did those investing in the fund), so it stayed.

Investing in different types of cap funds primarily serves to diversify your investments. You don’t want all of the same sized companies because their success does go in cycles. In 1998, large-cap funds sitting with Coca-Cola, General Electric, IBM, and other giant companies performed better than the small-cap mutual funds. In 2002 (and beyond) it was the other way around. One of the possible reasons is the tremendous growth in investing to a much wider sector of the population. No longer are the “yuppies” and Wall Streeters the only ones seeking out stocks and funds. As more and more people get into the stock market and buy into funds from their home PCs, they may be comfortable buying the larger companies with which they are familiar. There’s nothing wrong with this. After all, unless you’ve taken the time to sufficiently study some new, small-but-growing plumbing supply company, you too might lean toward the more familiar Wal-Mart or Disney. Some small-cap companies, such as those in the technical sector, are also very well-known to a very literate computer population, which is why a company like Intel or Dell Computer can also shine. As the newer online investors become more savvy, they too will branch out from safer, more familiar territory and explore the many growing companies.

Mega Funds

In a land where we always strive for something bigger, this is a fund that buys into other funds. Like a bigger fish eating smaller fish, it looks at the smaller funds and lets you diversify your diversification. As the number of mutual funds grows by leaps and bounds, you may see more mega funds buying mutual funds much the way mutual funds select from the thousands of stocks at their disposal.

Published Nov 10 2006, 01:20 PM by moneycoach
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