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.
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.
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
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.
These funds invest in large-cap companies across various sectors allowing a diversified investment portfolio.
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 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 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 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.
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 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.
Characteristics of Large-Cap Stocks
Large-cap stocks are a category of equities that typically represent companies with substantial market capitalisation, over ₹20,000 crore. These stocks exhibit several distinct characteristics:
Stability and Reliability: Large-cap stocks are often associated with well-established, mature companies that have a history of stability and reliability. They typically weather economic downturns better than smaller companies.
Blue-Chip Status: Many large-cap stocks are considered blue-chip stocks, which are recognised for their quality, reputation, and long-term performance. These companies often pay dividends consistently.
Liquidity: Large-cap stocks tend to have high trading volumes, making it easy for investors to buy or sell shares without significantly impacting the stock’s price.
Global Presence: Large-cap companies often have a global presence, with operations, customers, and revenue streams extending beyond their home country. This geographic diversification can reduce risk.
Dividend Payments: Many large-cap stocks offer regular dividend payments to shareholders, making them attractive to income-focused investors seeking stable cash flows.
Lower Volatility: Large-cap stocks typically exhibit lower price volatility compared to smaller-cap counterparts. This lower volatility can provide investors with a more predictable and less risky investment.
Blue-Chip Indices: Large-cap stocks often comprise major stock market indices like the Nifty 50, Sensex, etc., making them key benchmarks for the overall market’s performance.
Mature Business Models: These companies often operate in mature industries with well-defined business models, making it easier to evaluate their future prospects.
Market Leadership: Large-cap stocks are frequently industry leaders with dominant market positions, which can translate into sustainable competitive advantages.
Large Cap Versus Mid/Small Cap Funds
1. Investment Universe
- Large-Cap Funds: These funds primarily invest in stocks of large-cap companies, typically those with market capitalisations in excess of ₹20,000 crore. They focus on well-established, industry-leading companies.
- Mid/Small-Cap Funds: Mid-cap funds invest in companies with market capitalisations between ₹5,000 and ₹20,000 crore, while small-cap funds invest in companies with market caps below ₹5,000 crore. They target companies with growth potential and often operate in niche markets.
2. Risk and Return
- Large-Cap Funds: Large-cap stocks tend to be less volatile than mid/small-cap stocks and are considered more stable. Consequently, large-cap funds often offer more conservative, lower-risk investment options with potentially more modest returns.
- Mid/Small-Cap Funds: Mid and small-cap funds are generally riskier due to the potential for higher volatility. However, they may offer greater growth opportunities and higher returns over the long term.
- Large-Cap Funds: Large-cap funds may provide better diversification as they invest in a broader range of sectors and industries, reducing the risk associated with individual company performance.
- Mid/Small-Cap Funds: These funds may have less diversification since they concentrate on a specific segment of the market, potentially exposing investors to greater sector-specific risks.
4. Investment Goals
- Large-Cap Funds: These funds are suitable for conservative investors seeking stability and income through dividends, with a focus on capital preservation.
- Mid/Small-Cap Funds: These funds are more suitable for investors with a higher risk tolerance looking for growth potential and capital appreciation, even if it comes with increased volatility.
Wealth Creation by Large Caps
Large-cap stocks have the potential for wealth creation through steady and reliable growth. These established companies often generate consistent revenue and profits, allowing them to distribute dividends to shareholders. Their prominence and market leadership can also attract institutional investors and enhance stock liquidity. Large-cap stocks are also less susceptible to extreme price fluctuations compared to their smaller counterparts, reducing investment risk. Over time, as these companies expand, innovate, and adapt to changing market conditions, they can deliver substantial long-term capital appreciation, contributing to wealth creation for investors seeking stability and steady returns in their portfolios.
What Kind of Companies Are Large Cap?
In India, large-cap companies are typically those with the highest market capitalisation and are considered leaders in their respective industries. They tend to be well-established, financially stable, and often part of benchmark stock indices like the Nifty 50 or the BSE Sensex.
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.
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.
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What Types of Investors Should Consider Large-Cap Funds?
Large-cap funds are suitable for conservative investors with a lower risk tolerance looking for stable returns and capital preservation. They can be a core component of a well-diversified investment portfolio.
How Do Large-Cap Funds Provide Diversification?
Large-cap funds typically invest in diversified stocks across various sectors and industries. This diversification helps spread risk, reducing the impact of poor-performing stocks.
Is it better to invest in a large or small cap?
Large caps are mature companies that are less volatile and offer stable returns even during market downturns. However, small-cap companies can offer better returns on investment during a market uptrend. The ultimate investment, however, must depend on the investor’s financial goal and risk tolerance level.
What Are the Investment Benefits of Large-Cap Funds?
Large-cap funds offer benefits such as
- Portfolio diversification
- Income through dividend payments
- Capital appreciation from long-term investment
Which is better, flexi-cap or large-cap fund?
Large-cap funds are often considered the safest investment in the equity mutual fund category. These funds invest in stable blue-chip firms that offer steady and regular returns. However, if your aim is to invest in a diversified fund, flexi-cap funds can be a better option.