Large-capitalization funds generally invest in companies with market values of greater than $8 billion. Some, like the Vanguard 500 Index fund, merely mimic the index and invest in all 500 companies. Others, like Fidelity's huge Magellan fund, try to beat the index by picking a mix of large caps that will outperform the broader market.
Mid-Cap Funds
As the name implies, these funds fall in the middle. They aim to invest in companies with market values in the $1 billion to $8 billion range -- not large caps, but not quite small caps, either. The stocks in the lower end of their range are likely to exhibit the growth characteristics of smaller companies and therefore add some volatility to these funds. They make the most sense as a way to diversify your holdings.
Small-Cap Funds
A small-cap fund, like Turner Small Cap Equity, will focus on companies with a market value below $1 billion. The volatility of the fund often depends on the aggressiveness of the manager. Aggressive small-cap managers will buy hot growth and technology companies, taking high risks in hopes of high rewards. More conservative "value" managers will look for companies that have been beaten down temporarily by the stock market. Value funds aren't as risky as the hot growth funds, but they can still be volatile.
Micro-Cap Funds
We're talking small fries here -- companies with market values below $250 million. These funds tend to look for either startups, takeover candidates or companies about to exploit new markets. With stocks this small, the volatility (read risk) is always extremely high, but the growth potential is exceptional. Bridgeway Ultra-Small Company, for instance, sported a three-year average annual growth rate of 15.9% at the end of 1998, but in August, it had just come off a 13-week stretch in which it lost 22.8%.
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