What are large cap mutual funds?

Investing in mutual funds can help investors access the growth potential of the stock market. Among the many options available, large cap funds are often preferred by investors seeking the potential for relatively stable long-term return potential. Such funds can invest in the top 100 companies on the stock exchange based on market capitalisation. These are typically well-established firms with healthy fundamentals. As a result, large cap funds can be relatively lower risk compared to mid or small cap funds. This article explores what large cap funds are, their features, benefits, and key factors to consider before investing in them.

• Table of contents

1. Understanding large cap funds
2. Features of large cap funds
3. Benefits of investing in large cap mutual funds
4. How to invest in large cap mutual funds?
5. Who should invest in large cap funds?
6. Is it suitable to invest in large cap funds?
7. How does a large cap mutual fund work?
8. Things to consider before investing in large cap funds

Understanding large cap funds

A large cap fund is a type of mutual fund that primarily invests in stocks of companies with a large market capitalisation. The term “large cap” (an abbreviation of large market capitalisation) indicates the aggregate market value of a company's outstanding shares.

Market capitalisation classifications typically segregate firms into large cap, mid cap, or small cap, based on their overall market valuation. The large cap category typically includes firms with the highest market value within this spectrum.

As per SEBI circular dated 6th October 2017, the top hundred companies in terms of full market capitalisation are classified as large cap companies.

Features of large cap funds

A defining feature of large cap funds is their asset allocation strategy. Large cap mutual funds allocate their assets to leading and well-established firms that are typically known for their significant market value, robust financial health, and a proven track record of sustained performance. The portfolio construction of such funds prioritises equities that exhibit relatively low volatility, consistent dividend payouts, and a sustainable growth trajectory.

The risk profile associated with large cap funds is often considered to be on the lower side when compared to their mid and small cap counterparts. The reason behind the reduced risk is the relative stability of the underlying assets – essentially, blue-chip companies that have demonstrated resilience against economic downturns and possess strong balance sheets with minimal liabilities.

Benefits of investing in large cap mutual funds

The relatively low volatility of large cap stocks can make such funds suitable for investors seeking to balance long-term growth potential with risk mitigation. Additionally, large cap funds offer the following benefits to investors:

Relative stability and consistency: Large cap mutual funds have reduced exposure to abrupt market downturns due to their investment in established firms with diverse revenue channels. These firms, being stalwarts in their domains, generally possess inherent robustness against market volatility.

Returns: While large cap funds may not yield substantial short-term returns, they have historically delivered reasonable long-term returns. This performance trajectory can make large cap funds a suitable choice for capital appreciation over extended durations. However, it is important to note that past performance may or may not be sustained in the future.

Liquidity:The shares of large firms enjoy a considerable trading volume in stock exchanges, ensuring high liquidity. This liquidity implies that investors can execute buy or sell orders without inducing substantial price oscillations.

Professional management: Like other schemes, even large cap mutual fund schemes benefit from the stewardship of seasoned professionals who employ extensive research methodologies to select optimal stocks. This expert oversight offers a strategic edge to investors, especially those who might lack the resources or expertise to analyse the extensive array of available stocks.

How to invest in largecap mutual funds?

Here’s a structured approach to invest in largecap mutual funds:

Step 1: Choose an investment platform:

You can invest in mutual funds through:

• The asset management company (AMC), through the direct plan.
• Online platforms and mobile applications of brokerage firms or dedicated mutual fund platforms.
• Registered mutual fund distributors.

Step 2: Select a suitable largecap fund:

Consider key factors such as: The fund’s past performance*, experience and track record of the fund manager, the fund’s expense ratio and composition of the fund’s portfolio.
*Past performance may or may not be sustained in the future

Step 3: Choose an investment option

Lumpsum: Investing a one-time, larger amount.

Systematic investment plan (SIP): Contributing a fixed amount at regular intervals, such as daily, weekly, monthly or quarterly etc. SIPs help with rupee-cost averaging and can potentially reduce the impact of market volatility.

Step 4: Monitoring your investment

After making the investment via the platform you choose, regularly assess the fund’s performance to ensure it aligns with your financial objectives.

Who should invest in large cap funds?

Here’s who may find largecap funds suitable:

Investors with a high risk appetite: Largecap funds primarily invest in well-established companies, which tend to experience relatively lower volatility than midcap or smallcap funds. But these funds still carry high risk.

Long-term investors: Largecap funds offer the possibility of capital appreciation over the long term.

Investors seeking relatively stable equity exposure: Largecap companies often demonstrate greater resilience during market downturns than smaller firms. This can reduce the volatility of the overall portfolio. However, it is important to acknowledge that all equity investments carry risk.

Investors looking to build a core equity portfolio: Largecap funds can act as the foundation of an equity portfolio, offering exposure to established market leaders. They can also be combined with midcap or smallcap funds for diversification.

Investors interested in the growth of well-established companies: Largecap funds invest in financially strong companies with a proven track record. Investors who want exposure to such companies’ growth potential may consider these funds.

Is it good to invest in large cap funds?

The suitability of investing in largecap funds depends on individual investment goals and circumstances.

Largecap funds can help investors balance growth and build a core equity portfolio. Generally, investors with high rick appetite and long-term horizon find largecap funds suitable.

Largecap funds provide exposure to well-established, financially strong companies that are typically market leaders with a history of performance. Compared to midcap or smallcap funds, they tend to exhibit relatively lower volatility, which may appeal to investors with a moderate risk appetite

These funds can serve as a core component of a diversified equity portfolio, offering stability and the potential for long-term capital appreciation.

How does a largecap mutual fund work?

A largecap mutual fund pools money from multiple investors and primarily invests in the equity shares of largecap companies. Here’s a step-by-step breakdown of how it functions:

Fund collection: The Asset Management Company (AMC) launches the fund and collects money from investors through lump-sum investments or Systematic Investment Plans (SIPs).

Portfolio construction: A professional fund manager uses the collected funds to build a portfolio of stocks. The fund manager conducts detailed research to select stocks that align with the fund’s investment strategy. As per SEBI regulations, at least 80% of the fund’s assets must be invested in the equity shares of the top 100 companies by market capitalization on Indian stock exchanges.

Active management: The fund manager actively buys and sells stocks based on market trends, company performance, and investment objectives. The goal is to generate potential returns by leveraging the growth opportunities of largecap companies.

Net Asset Value (NAV): The NAV is calculated daily and represents the per-unit value of the fund’s assets after expenses. It fluctuates based on changes in the prices of the underlying stocks.

Returns and expenses: Investors can earn potential returns through capital appreciation, which is reflected in the increase in NAV. The fund charges an expense ratio, covering management fees, administrative costs, and distribution expenses. This reduces the overall returns to investors.

Regulatory oversight: The Securities and Exchange Board of India (SEBI) regulates largecap mutual funds to ensure transparency and investor protection.

Things to consider before investing in large cap funds

Before investing in largecap funds, conducting thorough research and evaluating key factors can help in making an informed decision.

• Historical performance: Review the scheme’s past performance over different market cycles.
  *Past performance may or may not be sustained in the future.
• Fund manager's experience and track record: Research the fund manager’s expertise and past investment decisions to assess their management quality.
• Expense ratio: Compare the expense ratios of different largecap funds, as a lower expense ratio means higher net returns.
• Portfolio composition: Analyze the fund’s holdings to ensure its investment strategy aligns with your financial objectives.
• Investment horizon: Largecap funds are generally suited for long-term investors. Ensure that your investment timeline aligns with this.
• Market conditions: Consider the broader economic outlook, as largecap companies can be affected by market fluctuations and downturns.
• Tax implications: Understand the tax treatment of capital gains in equity mutual funds and stay updated on any regulatory changes.
• Scheme Information Document (SID) and Key Information Memorandum (KIM): Read these documents carefully to understand the fund’s objectives, risks, and cost structure.
• Diversification: Ensure that your overall investment portfolio remains well-diversified instead of concentrating all investments in a single asset class.

Conclusion

Largecap mutual funds provide an opportunity to invest in India’s leading companies, offering relative stability compared to smallercap funds. They can be a suitable addition to a diversified portfolio, particularly for investors with a high risk appetite and a long-term investment horizon.

While largecap funds may not deliver the high-return potential of midcap or smallcap funds, they offer exposure to established market leaders and can support long-term wealth accumulation. However, they remain subject to market risks, and past performance does not guarantee future results. Before investing, evaluate your financial goals, risk tolerance, and investment horizon.

FAQs

What are large cap mutual funds?

Large cap mutual funds primarily invest in stocks of largecap companies, typically the top 100 listed firms in India by market capitalization. They seek to provide relatively steady growth by focusing on well-established and financially strong businesses.

Are large cap funds a safe investment?

No mutual fund investment is safe, and all equity funds are typically categorized as very high risk. Large cap funds tend to be relatively less volatile than mid cap or small cap funds, but they still carry market and company-specific risks. While they have the potential for growth, they are not risk-free investments and can be affected by market fluctuations.

What are the key benefits of investing in large cap funds?

Large cap funds have the potential for relatively steady growth as they invest in well-established companies. They can help diversify a portfolio and tend to experience less volatility than mid cap or small cap funds. They may be suitable for those focused on long-term wealth accumulation.

Who should invest in large cap mutual funds?

Investors with a high risk appetite looking for potential long-term capital appreciation may consider large cap funds. They can be suitable for those who prefer relatively lower volatility compared to mid cap or small cap funds. Large cap funds can also serve as a foundational part of a diversified portfolio.

How do I invest in large cap mutual funds?

You can invest in large cap mutual funds via online platforms, mutual fund distributors, or directly through asset management companies (AMCs). Complete the KYC process, choose a fund that aligns with your investment objectives, and submit the application. Seeking advice from a financial expert can be beneficial.

How do large cap mutual funds generate returns?

Large cap funds generate returns through potential appreciation in the market value of the stocks they hold and dividends, if any, paid by the underlying companies. The overall potential return depends on stock price movements, which is influenced by market conditions and company performance.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.