When it comes to selecting stocks for investment, the size of the company plays a critical role. The Indian stock exchanges follow a list that divides companies as large, mid and small caps based on their market capitalisation value. The first hundred companies in the list are large caps, with a market capitalisation of Rs 20,000 crore and over. These are the most established companies in the Indian market, with histories of steady performance, profit, and dividend payouts. These companies are the constituents of the market benchmark index. Investing in large-cap funds offers multiple benefits.
This article will see large-cap mutual funds meanings, features, benefits, and investment profiles.
So, what are large-cap funds?
What are large-cap funds?
Large-cap mutual funds are equity funds that invest primarily in large-cap company stocks. These are reputed companies with an excellent record of generating wealth. Since these companies are already established, they carry less risk than mid and small-cap fund schemes and generate steady income. Investors who prefer less risk and a long-term investment horizon must explore large-cap mutual funds.
These schemes invest a significant chunk of the capital (about 80 percent) in top companies like Reliance, TCS, Infosys, HDFC Bank, and others. They are market leaders in their specific segments and are strong market leaders.
Who should invest?
These funds are suitable for low-risk investors who want to prevent fund erosion due to market volatility and earn regular income from dividends. Since the fund is allocated to steady companies, the performance of these funds is stable and less vulnerable to the volatility seen in the equity market.
Large-cap mutual funds allow investors to diversify their investment portfolio in leading companies from different industries. So, if one sector fails to meet revenue expectations, the other companies will help reduce the loss. On the flip side, the returns generated by these funds are average as the underlying companies are stable and have less room for growth, unlike mid and small-cap companies.
Investing is a personal choice, but you must invest in large-cap mutual funds if you have a low-risk appetite and are happy with low average returns. First-time investors with less knowledge of the equity market can also invest in large-cap mutual funds. However, investors must find the best large-cap funds that fit into their investment strategy.
Things you should consider before investing in large-cap funds
Before investing in large-cap funds, investors should evaluate the fund’s suitability based on their overall investment goal. Since large-cap mutual fund schemes are equity investments, they are subject to market risks. Here are some of the factors investors should consider.
Risk and returns
All equity-linked mutual funds are subject to market risks. When the market benchmark of the scheme fluctuates, it causes the net asset value (NAV) to go up or down. However, large-cap companies are less prone to market swings, and their values don’t fluctuate much like those of mid and small-cap companies. The returns generated from these schemes are lower than medium and small-cap mutual fund schemes.
Expense ratio
The expense ratio is a fee the asset management company charges to pay the fund manager’s salary and other expenses. SEBI has set the upper limit of the expense ratio at 2.50% of the investment money. But since these funds generate lower income than a mid or small-cap, you should look for a fund that charges a lower expense ratio.
Investment horizon
Large-cap funds, too, are subject to economic slumps. So, when the market performance falls, the returns of these stocks also suffer setbacks. But since these are fundamentally strong companies, this underperformance averages out over time. Historically, these funds have generated an average return of 10-12 percent over an investment horizon of seven years.
Your investment goals
Large-cap funds offer steady returns against a reasonable amount of risk. Hence, many investors consider investing in these schemes while planning for retirement.
Past performance of the fund
Analysing the fund’s past performance is crucial for determining its future potential. You may select funds which have given steady performance in the past.
Experience of the fund manager
Fund managers are critical for these funds to move the capital in the right direction to optimise returns for investors when the market conditions are right.
Know the Exit load
The exit load comes into the picture when the investor redeems the units. But one must consider it while investing. Since the exit load is a part of the NAV, it will impact your overall returns from investment.
Benefits of investing in large-cap funds
Investment stability
Large-cap companies are fundamentally and financially strong, and they generate steady income. Hence, they are more stable against economic adversities and have little chance of solvency. These companies pay out regular dividends, which create a source of income for investors.
Better capital appreciation
Since these companies are stable, their stock prices don’t fluctuate much, resulting in better capital appreciation over a period.
Informed investment decisions
These well-known companies have structured balance sheets available to all investors who want to invest in them. Hence, you can make an informed choice with more insight.
Multi-sector diversification
These funds invest in large-cap companies across various sectors allowing a diversified investment portfolio.
High liquidity
Liquidity remains the least of your concerns when you invest in large-cap stocks. There will always be high demand for these stocks in the market, making it easier for the fund manager to move the fund from one company to another.
Cushion against economic downturn
Large-cap companies are better equipped to weather economic cycles. Hence, these are suitable for all types of investors.
How to invest in large-cap funds
How to invest in large-cap funds
Sharpe ratio
Sharpe ratio measures the risk-adjusted returns of mutual fund schemes. The higher the value of the fund’s Sharpe ratio, the better its returns are.
Standard deviation
Standard deviation measures the dispersion of a set of data from the mean or average measured. In finance, the deviation of an investment from its average indicates the fund’s volatility. Higher deviation means a broader price range, which indicates higher volatility.
Beta
Beta measures a fund’s sensitivity in correlation with the market’s movement. If a fund’s Beta is close to one, its volatility is equal to the movement of the market benchmark.
R-squared
The value of R-squared ranging between zero and 100 measures the percentage of the fund’s returns against the market benchmark. The higher value of R-squared means a more helpful value of beta.
Alpha
Alpha indicates the fund’s ability to register a profit when the market benchmark generates a profit. The value of Alpha can be more or less than 1.0. A higher Alpha means the fund successfully generates more profit when the benchmark moves.
Taxation of large-cap mutual funds
Your large cap mutual fund investment returns are subject to the following taxes.
Dividend Distribution Tax (DDT)
A 10 percent dividend tax is deducted at the source when a company pays a dividend.
Capital Gain Tax
When you redeem the units of your large-cap mutual funds, the capital appreciation is subject to capital gain tax.
- • A 15 percent short-term capital gain tax is applied when you redeem the units before twelve months of investment.
- • Long-term capital gain tax is applied when you hold the investment for more than one year. Tax is not deducted on returns up to Rs 1 lakh. After that, a 10% long-term capital gain tax is applied without the benefit of indexation.
Conclusion
Now that you have learned about large-cap funds, how they work, and their benefits, you can research the market for the best large-cap funds to invest in. Investors should invest a portion in large-cap stocks for stability and consistent investment returns.
