What are large-cap Funds?
If you are looking to invest in mutual funds, the plethora of choices may have confused you. There are many types of funds, and risks and returns on each will differ significantly. One criterion to use while selecting a fund is market capitalisation. Using this criterion, mutual funds can be divided into large-cap, mid-cap and small-cap funds. If you are a conservative investor with limited risk appetite and want stable returns, the best option for you would be a large-cap fund.
What is a large-cap fund?
So what is a large-cap fund? A large-cap fund is one that invests in well-established stable companies with large market capitalisation. Market capitalisation or market cap is the market value of a publicly traded company. In other words, market cap is simply the number of shares outstanding multiplied by the current market price. So companies are divided into small-cap, mid-cap and large-cap according to the extent of market cap.
According to the Securities and Exchange Board of India (SEBI), the top 100 companies in terms of market cap have been classified as large-cap companies. In monetary terms, this is between Rs 6 lakh crore and Rs 30,000 crore (as of June 2018). Some of the top companies in the large-cap list include Tata Consultancy Services, Reliance Industries, HDFC Bank, ITC, Hindustan Unilever and Maruti Suzuki.
Large-cap funds invest in the stocks of these companies, also known as `blue chip’ shares because they are relatively stable and secure. Of course, if there’s one thing you can be sure about the stock market, it’s uncertainty. The market cap of a company changes according to variations in share prices, and there’s no reason that a company will retain its pole position for all time to come. If you look at the composition of the Sensex, which accounts for 30 of the largest cap companies, only seven of the 30 stocks that made up the index in 1992 were there in 2016.
Nevertheless, large-cap funds are ideal for investors who do not want to take much risk and enjoy stable returns. Besides, large-cap companies offer regular dividends, ideal for those who want a regular income. Of course, investors must realise that you must be invested in the longer term to reap the true benefits, like say, five to seven years.
What are the benefits of large-cap funds?
Now that you know what is a large-cap fund, we can look at the benefits of these funds:
Low risk: The biggest advantage of investing in a large-cap fund is the low risk involved. These funds invest in large, well-established companies and their shares are going to be less volatile. Besides, their strong financial position allows large-cap companies to withstand bear phases better.
Stable returns: Since large-cap funds are less volatile, they are able to offer stable returns to investors. Dividends will also add to your investible corpus. These funds are helpful if you are interested in steady wealth creation.
More information: Since large-cap companies have been around for a long time, there is considerable information about them, helping make investors make better decisions.
Ideal for first-time investors: large-cap funds are ideal for first-time investors since information about these companies is easily accessible, and because of their stable returns and low risk.
High liquidity: Since large-cap funds are very liquid and have no problems finding buyers and sellers, fund managers are able to buy and sell when they want and maximise returns.
Diversification: A large-cap fund should be part of any diversified portfolio. If you are willing to bear a higher amount of risk, by all means, invest in small-cap and mid-cap funds, but ensure that you have some large-cap funds so that you reduce some of that risk.
Disadvantages of large-cap funds
Large-cap funds do have some disadvantages. These include:
Lower returns: While large-cap funds offer stable returns, they will be on the lower side since these funds invest in mature companies whose scope for expansion and growth is limited. small-cap and mid-cap funds, on the other hand, are in the growth phase, and may offer significantly higher returns in the long term. But of course, the risk is much higher.
Volatility disadvantage: It’s true that large-cap funds are less volatile than mid-cap funds. But there’s a downside to this: mid-cap companies do much better than their larger counterparts during a bull phase. So if you are in a prolonged bull phase, you could miss out by investing in large-cap funds.
How to invest in large-cap funds
large-cap funds are very popular with investors because of their stable returns and low risk. There are many schemes available in the market and since the companies these funds invest in are fairly well established, differences between schemes will not be that different. However, a good fund manager can make a difference in the returns made by a large-cap fund. It’s better to do a comparison of returns of different schemes before choosing one. You can download the Angel BEE mutual fund app, which ranks mutual funds so that you can find the best one. Also, remember to take into account expense ratio; you don’t want to invest in a fund that has a high ratio.
The investment in large-cap funds can be done directly through the asset management company or a distributor. A distributor can offer a wider range of choices than a mutual fund company since the former offers schemes from several companies, which will enable you to make the optimum choice. Investing online is another option since you can do it much faster. If you are not a first-time investor in mutual funds and have your KYC done, online investing should be your first choice.