Large cap mutual funds primarily invest in equity shares of companies with substantial market capitalisation like Reliance, HUL, and TCS. These companies are renowned for their market reputation, making large cap funds a stable investment choice.
In the expansive mutual fund landscape, large cap mutual funds stand out as symbols of stability and dependability. They are favoured by investors for their consistent performance and potential for balanced returns. In this article, you will explore in detail about what are large cap mutual funds, large cap mutual fund features, suitability, considerations, taxation, and how platforms such as Bajaj Finserv can elevate the investment journey. With their focus on established companies, large cap funds offer investors the assurance of steady growth and reliability, making them integral components of diversified investment portfolios.
What are large cap mutual funds?
Large cap mutual funds are a category of equity mutual funds that primarily invest in stocks of well-established and financially stable companies with large market capitalisations. These companies are leaders in their respective industries and are known for their strong fundamentals, robust track records, and market presence and they are typically the top 100 companies listed on the stock exchange. Investing in large cap funds allows investors to participate in the growth potential of these industry giants while minimising the risks associated with smaller companies. Typically, the top 100 companies listed on the stock exchange are considered as large cap companies.
How large cap mutual funds work?
The investment funds focusing on the top 100 companies in India, based on their market capitalisation, are known as large-cap funds. These funds have earned a distinguished reputation in the investment market. It is mandatory for large-cap funds to invest at least 80% of their assets in these top 100 companies. Choosing large-cap funds as an investment option provides the certainty that you are investing in reputed companies with consistently positive medium to long term returns. Consequently, large-cap funds generally exhibit lower volatility than mid-cap and small-cap funds.
How to evaluate best large cap mutual funds?
Investors should assess specific financial ratios when evaluating mutual funds. Key ratios include:
- Sharpe Ratio: This metric gauge a mutual fund's risk-adjusted return. A higher Sharpe ratio indicates better performance compared to peers.
Sharpe Ratio = (Mean portfolio return - Risk-free rate) / Standard deviation of portfolio return. - Standard Deviation: It measures the volatility of an investment's annual return, indicating how much it deviates from the mean. A higher standard deviation implies greater price range and volatility.Read more about, What is a standard deviation.
- Beta: Beta reflects a fund's sensitivity to market movements. A Beta of 1.0 suggests the same volatility as the benchmark. A Beta of 0.80 or less means 20% less volatility, while 1.30 indicates 30% higher responsiveness.
- R-Squared: R-Squared quantifies the percentage of fund returns aligned with benchmark returns, denoted as a percentage between 0 and 100%. Higher R-Squared values indicate greater alignment with the benchmark.
- Alpha: Alpha measures a fund manager's ability to outperform the benchmark. A higher Alpha signifies the manager's skill in generating profits from benchmark movements.
Read more about: Difference between the sharpe ratio and the sortino ratio.
Important features of large cap funds
Here are some important features if large-cap mutual funds:
- Risk Profile: Large-cap funds are considered to be less risky than other types of equity funds. However, they are still subject to market risk.
- Fees and Expenses: Large-cap funds typically have low fees and expenses.
- Stability: Large cap companies generally exhibit stable earnings and are less prone to market volatility compared to smaller companies.
- Consistency: Large cap funds often provide relatively steady returns over the long term, making them suitable for conservative and risk-averse investors.
- Dividend Income: Many large cap companies may distribute regular dividends, which can contribute to the fund's income generation potential.
- Diversification: Large cap funds offer diversification across multiple sectors, reducing the impact of sector-specific risks.
- Investment Objective: Large-cap funds invest in the stocks of large companies. The goal of these funds is to generate capital appreciation over the long term.
- Liquidity: Large-cap funds are highly liquid. This means that investors can easily buy and sell their mutual fund units.
- Performance: Large-cap funds have historically generated good returns over the long term.
Benefits of investing in a large-cap fund
Investing in large-cap funds offers numerous benefits, leveraging the performance of well-established companies. Here is a breakdown of the advantages associated with investing in large-cap funds:
- Stability in investment: These companies exhibit financial stability and consistent growth, ensuring resilience against market fluctuations. Large-cap investments provide portfolio stability and often include dividend payouts, enhancing investor wealth accumulation.
- Enhanced capital appreciation: Large-cap funds focus on high-performing companies, resulting in relatively stable mutual fund prices and sustained capital growth over time.
- Informed investment decisions: Established large-cap companies offer readily available information on profitability, financial statements, and operational details, facilitating informed investment decisions.
- Improved liquidity: Large-cap stocks offer ample liquidity, enabling investors to liquidate their holdings without significant losses, particularly during market downturns.
- Resilience to market fluctuations: Large-cap investments exhibit resilience during market upswings and downturns, providing a stable investment option even during economic recessions.
- Diversification across sectors: Investing in large-cap funds allows diversification across various sectors, leveraging the stability and reputation of blue-chip organisations. This diversification minimises the need for continuous monitoring across sectors while ensuring robust portfolio performance.
Who should invest in large cap funds?
Large cap funds are ideal for investors seeking stability and steady growth. They suit risk-averse individuals or those with a conservative investment approach. Investors looking for exposure to well-established, financially stable companies with strong market presence should consider large cap funds.
- Conservative investors: Those seeking stable returns with lower risk exposure.
- Long-term investors: Individuals with longer investment horizons who aim for consistent growth.
- Retirement planning: Investors looking to build a retirement corpus with a balanced equity exposure.
- Beginners: Investors new to the equity market who want to start with relatively lower risk.
Taxation of large cap mutual funds
Understanding the taxation rules is crucial when investing in large-cap mutual funds, as it directly impacts your mutual fund returns. In India, these investments adhere to particular tax regulations, encompassing Short-Term Capital Gains Tax, Long-Term Capital Gains Tax, and Dividend Distribution Tax. Let us know in detail about how these taxes influence your investments in large-cap mutual funds, enriching your financial planning and decision-making journey.
Tax implications |
Details |
Short-Term Capital Gains Tax (STCG) |
Gains from units sold within a year are taxed at a rate of 15%. |
Long-Term Capital Gains Tax (LTCG) |
Gains from units held for over a year are taxed at 10% on returns exceeding Rs. 1 lakh without indexation benefits. |
Dividend Distribution Tax (DDT) |
Deducted by fund houses before distributing dividends to investors. |
Risks and returns
Large cap mutual funds, while often considered safer than other types of funds, still carry certain risks and offer specific returns. Here is an overview of the risks and returns associated with large cap mutual funds:
Risks
- Market risk: Large cap funds are susceptible to market fluctuations, impacting the value of the underlying stocks in the portfolio. Economic downturns or adverse market conditions can lead to losses in large cap mutual funds.
- Concentration risk: Since large cap funds primarily invest in well-established companies, there is a risk of concentration in certain sectors or industries. Any negative developments in these sectors could significantly impact the fund's performance.
- Liquidity risk: Although large cap stocks are generally more liquid than small or mid-cap stocks, there can still be instances of liquidity risk, especially during market downturns or when large volumes of shares need to be sold.
Returns
- Stable returns: Large cap mutual funds typically offer more stable returns compared to mid or small cap funds. This stability is attributed to the established nature of the companies in which they invest, leading to more predictable earnings and dividends.
- Dividend income: Many large cap companies have a history of paying regular dividends. As a result, large cap mutual funds often provide investors with a steady stream of dividend income, enhancing overall returns.
- Growth potential: While large cap funds may not offer the same level of growth potential as mid or small cap funds, they still have the potential for capital appreciation over the long term. Investors can benefit from the growth of well-established companies in the portfolio.
Things to consider before investing in large cap funds
Before investing in large cap funds, it is crucial to assess your investment goals, risk tolerance, and time horizon. Consider factors like fund performance, expense ratios, and fund manager expertise. Evaluate market conditions and ensure large cap funds align with your overall investment strategy.
- Your risk tolerance: Large-cap funds are considered to be less risky than other types of equity funds. However, they are still subject to market risk. If you are not comfortable with the risk of losing money, then large-cap funds may not be the right investment for you. Read more about, What does risk tolerance mean?
- Your investment horizon: Large-cap funds are a good investment for investors who are looking for long-term growth. If you need to access your money in the short term, then large-cap funds may not be the right investment for you.
- Your investment goals: Large-cap funds are a good investment for investors who are looking to generate capital appreciation over the long term. If you are looking for income, then large-cap funds may not be the right investment for you.
