When you buy shares of a small-cap fund, you expect it to invest in small-cap stocks. But that's not always how it works out.

To prove our point, this week's I Own What!? zeroes in on small-cap funds that actually have less than half their money invested in small-cap stocks, defined as stocks with

market capitalizations less than $1.4 billion. We found them by screening for funds with small-cap labels and a median market cap north of $1.4 billion. That essentially means that if you list a fund's holdings by size, those in the middle will be bigger than small-caps. Using this criteria, we found 28 small-cap funds that have a taste for mid- and large-cap stocks. From that list we plucked the five funds from each category with the highest median market cap.

If you're thinking a small-cap is a toddler's Red Sox hat, let's run through the basics. A stock's market capitalization is the number of shares outstanding multiplied by the current price. A giant like

General Electric

has a market capitalization or market cap of $366 billion, while restaurant chain

Applebee's

has a market cap of about $1 billion.

What makes a stock small-, medium- or large-cap? Here's a cheat sheet: Morningstar defines a small-cap as a stock with a market cap between $200 million and $1.4 billion, a mid-cap as a stock with a market cap between $1.4 billion and $8.9 billion, and a large-cap as having a market cap above $8.9 billion.

You might logically wonder how a "small-cap" fund ends up owning so few small-caps. The reason: Each fund is labeled by fund trackers like Morningstar or Lipper according to what stocks have been in their portfolios over the past few years. That makes sense, but most funds have the leeway to invest part or even all of their money in mid- and large-cap stocks, too. Some have names that spell this out, like the

(PVEYX) - Get Report

PaineWebber Pace Small/Medium Company Value fund. Others don't, like the

(MSCEX)

Monetta Small-Cap Equity fund, which had almost 68% of its money in mid- and large-cap stocks at the end of September, according to Morningstar.

Of course, these aren't the only small-cap funds that own large-cap stocks. On June 30, the

(KOPPX)

Kopp Emerging Growth fund, classified as small-cap growth by Morningstar, owned shares of cratered large-caps like networkers

Cisco

and

JDS Uniphase

.

You might wonder if we're making a mountain out of a mole hill. After all, these funds do mostly own stocks, some of which are small-caps. The problem is that most investors buy shares of a small-cap fund to diversify their portfolio because most investors primarily have exposure to big-cap stocks.

The idea is that they perform in different cycles, so owning both can smooth out your portfolio's performance when one or the other falls from favor. Consider that the average small-cap growth fund is down about 20% over the past 12 months, but the average big-cap growth fund is down more than 36% over the same stretch. And small-cap value funds, up 14% over the past year, have topped large-cap value funds by more than 18 percentage points.

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So you can see the advantages of owning both small- and large-cap funds, but that disappears when your "small-cap" fund owns many large-cap stocks. Consider that the

(DGRBX)

Morgan Stanley Developing Growth fund, which has 66% of its money in mid- and large-cap stocks, is down some 33% over the past 12 months. That fall is in line with the average big-cap growth fund, no doubt reflecting the fund's mostly big-cap portfolio.

The take-away from this exercise is, as usual, that a fund's name or classification doesn't necessarily tell you what it owns. Before you buy shares of any fund, you need to skim through its most recent shareholder reports or simply peruse its portfolio summary on sites like this one or Morningstar.com. Otherwise, you might end up with a different fund than you wanted. And if you've ever ordered a steak and gotten instead a soggy bowl of Chex, you know well what that's like.

Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

imcdonald@thestreet.com, but he cannot give specific financial advice.