As someone who has made the decision to start investing in mutual funds, you are way ahead of your peers.
This decision, however, comes with its own set of challenges. You need to understand what your investment goals are. You need to have a good idea about how much of your income you can set aside for your investment.
This decision also comes with a host of responsibilities. And one of those responsibilities is to educate yourself and understand all that there is to know about investing in mutual funds.
In order to understand mutual funds properly, you need to learn about the different categories of mutual funds and the different sectors they represent.
One such category of mutual funds is large-cap mutual funds.
In this article, we want to talk about large-cap mutual funds and help you understand what these funds are.
By now, you must already be aware that mutual funds are broadly divided into two categories: equity funds and debt funds.
Each of these funds is further categorized on the basis of the fund size, underlying asset, industry sector and so on.
You might have many questions about large-cap mutual funds.
We hope to address all of them in this post.
First, let’s start with understanding what market capitalization means.
What is Market Capitalization?
Market capitalization - also commonly addressed as “market cap” or just “cap” - is the market value of a company that is publically traded in the stock market.
Market capitalization is calculated by multiplying the total number of outstanding shares by the price of each share.
Outstanding shares refer to the number of shares issued by the company, that are held by its shareholders and investors.
Let’s look at an example to understand market capitalization better. Let’s assume a company that recently went public issued 100 shares at the price of Rs. 10 each; in this case, the market capitalization of this company is Rs. 1000.
Understanding market capitalization is important because it is one of the key characteristics that factor into an investment decision. It helps an investor determine the rate of return and the risk involved in purchasing a share.
This will also help you build an investment strategy according to your financial goals and also help to achieve a balanced portfolio.
How are Different Funds Classified?
As we have previously discussed in this article and several other blog posts on Scripbox, mutual funds are either equity-based or debt-based.
This is because of the way mutual funds are organized. Mutual funds are mostly categorized on the basis of asset classes.
Based on these asset classes, broadly, there are about four types of mutual funds. Equity funds are almost always exclusively include stocks. Debt funds or fixed-income funds include bonds. Money market funds include short-term debt for the purpose of liquidity and lastly, balanced or hybrid funds are mostly a combination of both stocks and bonds.
Since equity mutual funds are the ones that include company stock and shares as their investment assets, large-cap funds almost always fall under equity mutual funds.
Understanding this classification is important as we proceed further.
What are Large Cap Mutual Funds?
Large-cap stocks are stocks of the topmost companies listed on the stock exchange. Large-cap companies have extremely high market capitalization.
Large-cap stocks are a set of companies that have a market capitalization upwards of Rs. 20,000 cr.
These are the companies that were established many years ago and have consistently performed well. They are the market leaders in their respective sectors and carry an impressive track record. These are the companies that have emerged as leaders irrespective of many business adversities over the years.
Some examples of large-cap companies in India include Reliance Industries Ltd, TCS, HDFC Bank, Infosys, Bajaj Finance, Asian Paints, etc.
Large-cap mutual funds are a category of equity mutual funds that predominantly invest in large-cap companies.
As per SEBI’s (Securities and Exchange Board of India) guidelines, large-cap mutual funds invest 80% of their corpus in large-cap companies.
Difference between Large Cap, Mid Cap, and Small Cap
As we just discussed, large-cap funds invest in the top 100 companies ranked as per their market capitalization.
Mid-cap companies are companies with a market capitalization that ranks from 101 to 250. These are the companies that are smaller than large-cap companies in terms of size, profitability, and business operations. Mid-cap equity mutual funds predominantly invest in mid-cap stocks. As per SEBI guidelines, mid-cap equity funds must invest at least 65% of their corpus in mid-cap stocks.
Mid-cap companies approximately have a market capitalization of more than rs. 5000 cr but less than rs. 20,000 cr. Federal Bank, Manappuram Finance, RBL Bank and Yes Bank are some examples of mid-cap stock.
Small-cap companies are the ones that rank after the 250th company as per market capitalization. Roughly speaking, any company with a market capitalization of under Rs. 5000 cr is considered small-cap. Karnataka Bank and Avanti Feeds Ltd., are examples of small-cap companies.
You can learn more about it here.
Understanding Different Sectors of Large-cap Mutual Funds
Just as we discussed varying degrees of market capitalization, we wanted to include a quick note about different sectors represented by the large-cap funds.
For example, some of the most popular sectors include healthcare, technology, telecom, infrastructure, energy, pharma, financial services, FMCG and so on.
Companies like Infosys and TCS belong to the technology sector while companies like Bharti Airtel belong to telecom. HDFC Bank represents financial services while ITC Ltd., represents FMCG.
As the equity markets are volatile, there is a possibility that some sectors enjoy a good quarter while the other sectors fall short of their expectations. This is a primary reason for large-cap funds to include multisector stocks.
For instance, let’s assume that the technology sector performed slightly better than the energy sector in the past quarter. The sector that performed better will be able to make up for the underperformance of the other sector. This strategy leads to having a well-balanced fund.
Benefits of Investing in Large Cap Funds
Investing in large-cap mutual funds has its fair share of advantages. Let’s take a look at some of them in this section.
- Better capital appreciation.
Since large-cap funds only invest in large companies, they are in a position to offer better capital appreciation over the years. Capital appreciation is an increase in the price or value of an asset. Simply put, it is the difference between the purchase price and selling price of an investment.
- Stability to your portfolio.
Although large-cap companies are actively traded in the equity market, they are not as volatile as some of the mid-cap and small-cap ventures. Even if the return generated by large-cap companies is moderate, the growth is always consistent and in mostly in a positive direction. Therefore, investing in large-cap mutual funds will add stability to your overall investment portfolio.
- Long-term wealth creation.
Large-cap companies are well-established organizations that have been around for a long time and that will continue to operate well for the foreseeable future. If you invest in a large-cap stock, you will witness a steady growth over the years. For this reason, large-cap funds are always considered a favorable option for investors who are focused on long-term wealth creation.
- Ability to withstand a bear market.
Since large-cap companies have been around for such a long time, they have the ability to withstand multiple market cycles. They thrive in a bull market and when the market is sluggish, they either remain stable or bounce back quickly. More often than not, they withstand a bear market unhinged. And this by default is a huge plus point for any investor.
- Multi-sector diversification
As we discussed in the previous section, large-cap equity funds invest in large-cap companies from multiple different sectors. This automatically gives you the advantage of diversifying your investment without having to separately invest in each of these sectors. You don’t have to take the trouble of monitoring individual sectors and tracking their performance.
Who Should Invest in Large Cap Funds?
Large-cap mutual funds are an ideal investment opportunity for anyone looking to start investing in mutual funds.
But if you are someone who fits into one of the categories listed below, you should definitely consider investing in at least one of the large-cap equity mutual funds.
- You are a rookie investor just beginning your investment journey.
- You are willing to start investing early and are focused on building long-term wealth.
- You want to start small and understand how equity mutual funds work.
- You want to minimize the impact of market volatility on your investments.
- You want to stay invested for a long period, around 5 to 7 years.
- You want to invest in companies that are trustworthy with a strong track record.
- You want to invest in companies that have proven to be financially stable with solid business models in place.
Additional Factors to Consider while Choosing a Large-cap Fund
There are a few additional factors you must consider while investing in a large-cap fund. We have briefly talked about some of them here.
- With any kind of investment, you need to have a very clear idea about three key aspects. If you are a regular reader of the Scripbox blog, you are probably tired of hearing this already, but we wanted to include it here as these really are that important for your investment decisions.
a. Your financial goals - what are your short-term and long-term financial goals? You can use this 5-step approach to decide your financial goals.
b. Your understanding of risk - are you willing to take high risk for high return or you are looking for something with low risk and moderate return?
c. Your investment horizon - how long are you willing to stay invested?
- You should look at factors such as fund age, assets under management, past returns, expense ratio, and other important information.
- It is always advised to look at the last three years’ performance of the fund. This will help you get a good idea about how the fund has been performing and what kind of return has the fund generated.
- It is important to pay attention to other aspects such as the fund house reputation, the fund manager’s track record, the investment process and so on.
Examples of Top Large Cap Funds
Choosing the right large-cap mutual fund is not an easy task. In spite of spending a lot of time researching, you might not find a straight forward answer. There so many well-performing large-cap funds.
If you choose to invest with the help of Scripbox, we completely take the guesswork out of the way. We have a scientific investment process that analyses over 8000 mutual funds, compares their historic performance and recommends only the best options as per your investment needs.
Among the top 5 best performing large-cap mutual funds, two of them are included in our Scripbox recommendation for long-term wealth generation goals.
Let’s take a quick look at them.
Mirae Asset Large Cap Fund (Growth)
The main objective of this fund is to generate long term capital appreciation by investing in equities of large-cap companies. The fund manager is Gaurav Misra and the fund allocates 96% of its corpus to large-cap equity investments.
This is a high-risk fund that has generated a favourable return of around 11.93% over a 5 year period.
HDFC Top 100 Fund (Growth)
The goal of this fund is to generate reasonably favourable returns by investing in large-cap equities. The risk factor of the fund is moderate with a 5-year return of around 10.6%
The fund manager is Prashant Jain and the fund allocates 99% of its corpus to equity investments.
You can learn more about this fund here.
I hope this article answered some of your questions about large-cap mutual funds. As we have mentioned before, investing in large-cap equity funds can be complicated. Take your time to do additional research and learn as much as you can.
Set some time aside to make a list of your financial goals and figure out what exactly you want your investments to do for you. Based on your requirements, you can choose a fund that is best suited for your current and future financial needs.