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Index funds are mutual funds that mimic the benchmark, also aiming to give market returns at lower costs. On the other hand, large-cap funds are actively managed portfolios by fund managers that invest in large-cap companies. They come with additional costs than index funds. Read the article to understand the difference between Index Funds vs Large Cap Funds

Difference Between Index Funds and Large Cap Funds

The following are the differences between Index Funds vs Large Cap Funds

ParametersIndex FundsLarge Cap Funds
MeaningIndex fund is a mutual fund that tends to replicate the benchmark index and also invests at least 95% of its underlying assets in the similar weightage of the underlying benchmark index.A large cap mutual fund invests at least 80% of its underlying assets in equity and also equity-related instruments of large-cap companies. 
Portfolio ManagementPassively managed portfolioActively managed portfolio
Investment StrategyThe fund manager does not have the flexibility to structure the portfolio. It simply replicates the composition of the benchmark index. Also, the fund management team tracks the changes in index composition and implements the same changes in the fund. The fund manager takes an active investment decision about the sector and stocks in the portfolio, predominantly investing in large-cap companies based on the fund objective. 
ReturnsThe returns generated by these funds will be similar to the returns generated by the underlying index. Since the fund manager has the flexibility to construct the portfolio from the top 100 stocks, these funds may outperform the benchmark index, also generating alpha for investors 
RiskIndex funds are passively managed funds which are exposed to systematic risk because of the stock market movementsLarge cap funds are exposed to unsystematic risk due to the overall decisions by the fund managers. 
Expense RatioIndex funds have a lower expense ratio as it involves less fund management discretion. It ranges between 0-2%.Large cap funds have a higher expense ratio, which can go up to 2.5% because the fund manager actively manages the portfolio. It charges its fund management fees through expense ratio. 

Who Should Invest in Index Funds?

Index funds aim to mimic the performance of a benchmark. They offer returns similar to benchmark returns. These funds are suitable for investors with long term investment horizons. Also, it is ideal for investors who prefer earning predictable returns. Since the risk associated with these funds is low, investors with a low-risk tolerance level looking for equity exposure can consider these funds. Moreover, index funds are passively managed funds which do not require continuous portfolio monitoring. Hence, index funds are best suited for investors who want to invest and forget about their investment for a long time. 

Who Should Invest in Large Cap Funds?

Large cap funds are suitable for investors who are looking for stable returns that do not fluctuate too much with market volatility. The financial stability of the large cap companies makes them capable of withstanding the bear markets. These funds provide better capital appreciation in the long term. Also, dividends are distributed reasonably and at regular intervals. Therefore, investors with a low understanding of risk can take advantage of equity investments through large cap funds. Investment in these funds is ideal from a long term investment horizon perspective. 

Index Funds vs Large Cap Funds- Which is Better?

Both index funds and large cap funds have their own pros and cons for investing, offering equal opportunities for creating wealth for investors. Index funds provide direct exposure to the benchmark indices like Nifty 50, Nifty Next 50, Sensex30, etc. It provides a broader range of stocks from well-performing sectors of the economy that helps in diversification. Index funds can be suitable for new investors looking for equity exposure as they are more likely to understand the index returns. 

On the other hand, a large cap fund is an active investment product which can equip investors with better returns than broader markets. Also, the fund managers’ research and investment strategy can help generate alpha for its investors. An experienced investor can consider large cap funds as they understand the market sentiments and volatility. 

An actively managed portfolio requires continuous monitoring of the portfolio, while index funds simply match the benchmark’s returns, and they cannot expect higher returns from the benchmark. Therefore investors looking for higher returns than the benchmark can consider large cap funds. However, the choice for investment is solely not dependent on the fund returns. Investors have to choose based on their financial goals, investment horizon and understanding of risk. 

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