Large cap mutual funds are equity oriented funds that invest in companies with large market capitalisation. These funds are suitable for an investor with moderately-high risk appetite & long term investment horizon.
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Investors find choosing the right equity mutual funds challenging. Finding the right selection of stocks, an efficient fund manager, and a well-performing fund can be tough. Market capitalization is an important parameter when investing in equity funds. It can be simply understood as the size of the company. Analyzing the market capitalization helps you determine the benefits of investing in the company and identify any risks involved.
Equity mutual fund schemes are categorized based on the market capitalization of companies they invest in. The classification is done as large-cap funds, mid-cap mutual funds, small-cap mutual funds, and multi-cap mutual funds.
Large Cap organizations are established, market players. They are vintage brands and have a fair reputation. Consequently, these organizations are trustworthy with a stable corporate administration. SEBI has recently released recategorization guidelines. According to them, the top 100 companies in terms of market capitalization are Large Cap Companies. These companies are also known as Blue Chip companies.
Let’s explore Large Cap Mutual Funds and their features to help you start investing in these schemes.
Large Cap Mutual Funds invest a bigger portion of their assets in companies with large market capitalization. These are companies of high repute having an excellent track record of wealth generation. Large Cap Funds benefit their investors over a long period to generate regular dividends. As a result, this helps in the steady compounding of investor’s wealth. These funds are low-risk in comparison to small-cap or mid-cap funds. Therefore, investors can benefit from steadier returns of these funds if they have a low-risk appetite. Consequently, the investment horizon of these schemes is long-term.
These funds invest a bigger portion of their assets under management (AUM) in the top performers of the market. Hence, investing in these funds is considered less risky. You can expect steady returns from your investment in the medium to long-term horizon. If you are a risk-averse investor large-cap funds pose a lesser risk to your portfolio. But you must note the risk is only lesser in contrast to small-cap and mid-cap funds.
Large Cap Mutual Funds invest a significant portion (around 80%) of their corpus in top-notch companies. These are companies that have a market capitalization of over Rs. 20,000 Crores. You can easily identify these companies because they are market leaders in their specific industrial sectors. They have a strong market positioning, for the same reason they are known to exhibit strong growth with high profits. Investors can enjoy better capital appreciation, steady compounding, and regular dividends from these companies.
There are the following benefits of incorporating large-cap stocks into your investment portfolio.
Large-cap companies are financially sound. They have proficient business plans, regularly record growth, and consistently generate revenue. Owing to their stability the income of large-cap funds is also consistent. Hence, large-cap ventures rarely face solvency due to economic circumstances. Market fluctuations do not impact their performance. Thus, they offer stability to your portfolio. Furthermore, large organizations also declare a handsome dividend. This helps in steady wealth creation for your portfolio.
Large-cap mutual fund schemes invest their corpus in blue-chip companies. The high performance and stable earnings of these companies offer promising returns. The stock prices of large-cap companies do not fluctuate much. As a result, they offer capital appreciation to investors over the years.
Obtaining details about large-cap companies is easy. As they are established market performers and have functioned well for years their information is readily available. You can easily access data about their operations, profitability, and even financial statements. This transparency makes them an investment-worthy stock. Investors can easily obtain and analyze the data before making an investment decision.
Large-cap equity stocks offer a huge amount of liquidity. During adverse market conditions, investors can easily liquidate their entire portfolio. Market fluctuations do not majorly impact the stock prices which keeps any significant loss under check. Liquidity plays a vital role during volatile stretches in the market. Large-cap fund managers usually buy and sell the high-cap stock to maximize returns.
Large-cap equities have the potential to sustain through the ups and downs of multiple market cycles. They thrive well during a bullish run and can also endure market turbulence. It’s a relatively reliable investment option that can weather an economic downturn. It recovers quickly without threatening business prospects.
The large-cap mutual funds help you diversify across market capitalizations. Since the funds invest in top companies from multiple sectors, you can enjoy diversification. Your portfolio automatically gets the required exposure in each sector. You do not need to continuously monitor the performance of the sector or stock.
Although large-cap funds are highly stable and less risky they do have some disadvantages.
Following are the disadvantages of investing in large-cap funds:
Large Cap Mutual Funds are the right choice for individuals who need to make good use of equity investments. Investors who want stable returns that do not keep fluctuating too much with time can select large-cap funds. The financial stability of Large Cap funds makes them capable of withstanding bear markets.
However, even the best Large Cap funds might fail to meet expectations of great returns from the market. Unlike mid-cap or small-cap equity the returns are constant. Though these schemes provide better capital appreciation in comparison to mid-cap and small-cap funds in the long term. Dividends are distributed reasonably well and at regular intervals. Large-cap funds are an avenue for those investors who do not want fluctuating returns. You can take advantage of equity investments by investing in these funds.
Large-cap companies can weather bear markets but they may underperform in comparison to mid-cap and small-cap companies. They are financially stable and their returns do not go below the market benchmark. You can keep investing even when the market is down to nullify the effect of loss in your portfolio. The funds are not immune to market downturns but withstand them relatively better than other funds.
When selecting large-cap funds for your portfolio you must consider your investment horizon and risk/return objectives. For good returns an investment horizon of at least five to seven years is advisable. These funds are ideal if you are a risk-averse investor with a long-term investment perspective.
Large Cap Mutual Funds sound lucrative to investors considering the consistent returns and low risk they offer. But, investors must consider the following things when investing in them.
Like other equity funds, Large Cap funds are also prone to risks that come with the market. However, they are impacted moderately by these risks. The fluctuations in the Net Asset Value (NAV) of these funds are relatively smaller when you compare them with other funds. You can invest in them to leverage their stability. These funds may underperform during a market rally but out-perform during a slump. As a result, you may consider aligning the core of your portfolio around them. It will bring great stability to your investment portfolio.
Large Cap mutual funds come with an expense like all other equity funds. This is the expense ratio of a fund and it ensures your investment is well-managed. A lower expense ratio means you get higher take-home profits. Large-cap equity funds charge a fee as the fund manager manages your investment. The expense ratio appears as a percentage of the average asset under management (AUM). This reflects on the operating efficiency of the fund. As per the mandate by SEBI, the upper limit of the expense ratio is 2.50%. The lower expense ratio of large-cap funds coupled with a long-term holding period helps in recovering its underperformance.
You can get the best returns from large-cap equity funds if you invest for the long term. It is recommended to remain invested in these funds for at least five years. This would help you realize the potential of returns on your investment. The fund can experience a lot of underperformance when the market slumps. Your returns average out in the long run over around seven years to give returns in the range of 10%-12%.
The Tax treatment of large-cap funds is the same as other equity assets. You earn capital gains when you redeem your large-cap equity funds. These capital gains are taxable according to their time duration of investment known as the holding period. An investment with a holding period of one year is liable for short-term capital gains (STCG). These capital gains attract 15% of tax. On the other hand, long term capital gains (LTCG) are investments with a period of over one year. According to the prevailing tax rate, any capital gains over Rs. 1 lakh are liable for a 10% tax. The taxation amount does not include the indexation advantage.
Large-cap equity funds are ideal for achieving long-term goals. As an investor, you can take advantage of the steady returns of these funds, while you expose your portfolio to a reasonable level of risk. These funds keep a check on the erosion of fund value during a market slump. These funds are ideal for accumulating wealth to achieve goals. You can invest in these funds for planning expenses such as higher education of kids, the marriage of children, and retirement. It is ideal for you if you are a new investor aiming at a safe exposure in the equity markets. But you must be wary of the risks involved when building a portfolio around these funds. You can enjoy the ease of investing, steady returns, and favorable tax treatment with these funds.
You can give your portfolio a boost with large-cap mutual funds. You must analyze your short-term financial needs and long-term goals to realize the full potential of these funds. It is advisable to research parameters like the expense ratio and past performance of the fund before investing. The fund house’s reputation and fund manager’s credibility are also important factors to consider. Consider these factors to pick the fund that aligns with your financial goals and risk tolerance.