Understanding Large Cap Funds
By Akhil Chugh
Date August 28, 2021
“To be an investor you must be a believer in a better tomorrow.”
Investing in the share market is a game of risk and return, the higher the risk you take, the higher the return can be expected. But many times, as an investor, one may want to avoid taking too much risk, and such investors are known as conservative investors. The best investment option for such investors is mutual funds, and an even better one is Large Cap mutual funds. Let’s understand Large Cap funds in detail.
What are Large Cap Funds?
While selecting an equity portfolio, the market capitalization or size of the company is an important parameter as it determines the risks and benefits of investing in the company. Thus, equity mutual fund schemes are categorized based on market capitalization – Large Cap mutual funds, Mid Cap mutual funds, Small Cap mutual funds, Multi Cap mutual funds, etc.
Large Cap funds are equity funds that invest a bigger proportion – minimum 80% of their total assets in companies with a large market capitalization. These companies are highly reputed and well-established with stable corporate governance practices and have an excellent track record of generating wealth for their investors over a long period. Large Cap Funds are hence known to generate regular dividends and steady compounding of wealth. Also, these schemes carry a lower risk as compared to the small-cap or mid-cap schemes and are known to generate steadier returns.
According to SEBI, large-cap companies fall in the top 100 of the lists of companies according to market capitalization. Hence, investing in these companies is considered to be relatively less risky and steady.
Who Should Invest in Large Cap Funds?
Large Cap funds are ideal for investors with low-risk tolerance who looking to grow wealth over 5+ years. So generally, these funds are preferable for long-term financial goals like retirement plans, child’s higher education etc.
Since these mutual funds are less risky and provide regular returns, it is best for conservative investors. It is also perfect for beginners who are new to mutual fund investments. Since it’s a mutual fund, you will not have to worry about managing the stock because that will be done by professional fund managers. And in terms of risk and return, large-cap stocks are safer.
One thing that investors should keep in mind before investing in Large Cap funds is that these funds do provide consistent returns, but they do not give higher returns when the market performs well. So, expect consistent returns without any ups and downs.
Benefits of Investing in Large Cap Funds
Large Cap mutual funds are considered to be the superior vehicle for investing as they provide the investors with good returns and consistent performance record that keep on compounding with duration. Let’s look at some of the benefits in detail below:
- Track record of large-cap companies:
The stocks in which this fund seeks to invest are not only large in size but are also the companies that have been established for years and have made a trusted name for themselves based on a track record of operational and financial efficiency. The operational stability of these companies can make them financially stable – giving them the ability to sail smoothly through different market cycles. They thus may have a relatively lower propensity to risk as compared to mid & small size companies.
- Portfolio diversification:
As Large Cap funds are low-risk, low-reward investments, they can be a good addition towards building a balanced portfolio. Also, as the Large Cap fund invests within the large-cap space, it selects stocks from varying sectors with an aim to provide sectoral diversification in your investment.
- Stability:
Since large-cap companies are financially sound with proficient business plans, their growth, revenue generation, and income are consistent. They are not affected by the market fluctuations and thus offer stability to the portfolio. Large organizations also hand out a consistent dividend which helps in the steady wealth creation of the investor.
- Liquidity:
Large Cap funds are highly liquid compared to other funds. It’s therefore easy to rebalance the entire portfolio in an adverse market without impacting the prices and causing any significant loss.
- Informed Investment Decision:
Since large-cap companies are well-established and functional for years, details about their operations, financial statements and profitability levels are readily available. This transparency makes it easy for investors to analyze the data and establish whether it’s an investment-worthy stock.
Best Large Cap Funds to Invest:
Based on our analysis and research at Net Brokers, below mentioned schemes are currently the best schemes in the Large Cap fund category. These funds fare well on quantitative and qualitative parameters and have the potential to deliver superior growth in the long run.
Key Takeaways from Net Brokers:
- Just as we seek out branded consumer goods, it is the large-cap, established listed companies that can be looked upon for funding long-term goals.
- Net Brokers believes that Large Cap funds are an ideal investment option for investors who have a low-risk tolerance coupled with a long-term investment horizon.
- Large Cap funds invest in strong large-cap companies with a well-planned long-term growth trajectory. So Net Brokers recommends its investors to invest in Large Cap funds for at least 5 to 7 years to witness the potential of returns on offer.
- Large Cap funds can be a stable addition to an investor’s portfolio regardless of age because they offer steady returns with reasonably lower risk.
- If you are new to mutual fund investment and are wondering which funds will generate good returns with relatively less risk – Large Cap mutual funds are the solution.
Investors should carefully scrutinize various Large Cap mutual fund schemes before making investments based on parameters like expense ratio, fund’s performance etc. Gauge your risk appetite and the time horizon for which you can stay invested to choose the fund that best suits your investment goals.
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