Equity mutual funds are classified by market capitalisation – large-cap mutual funds, mid-cap mutual funds, small-cap mutual funds, multi-cap mutual funds, etc. So, before you start investing, you need to understand these terms. In this article, we’ll examine Large Cap Mutual Funds and what you need to know in detail.
An investment fund that focuses on large-capitalization companies is called a large-cap fund. Large cap equity funds are also known as blue-chip funds since they invest in the biggest companies. In the long run, these funds give stable returns and are considered safe investments. Now, let’s understand large cap fund meaning in detail by exploring their features, benefits and suitable investors for this mutual fund.
Large Cap Funds Meaning
A large cap fund meaning refers to a fund that invests a big chunk of its assets in companies with big market caps. Companies like these are highly reputable and have a great track record of generating investor wealth. Therefore, these funds are known to pay regular dividends and compound money.
These schemes are also lower risk than small-cap or mid-cap schemes and are known to give steady returns. For investors with a long-term investment horizon and a relatively low-risk appetite. As per SEBI, large-cap companies rank among the top 100 largest companies. Due to this, investing in these companies is considered a less risky and more stable investment option.
Features Of Large Cap Funds
Large-cap funds include the following features:
- The term “large-cap” or “blue-chip” refers to funds that invest mostly in stocks rather than any other asset class. Their primary focus is on blue-chip stocks among various types of equities.
- It is easy to trade blue-chip stocks even in bad times since they are renowned for their quality, reliability, and reputation. Plus, stocks are frequently sold and purchased, resulting in easy cash flow, making blue-chip funds highly liquid.
- A large cap company’s stock value does not undergo rapid changes often because blue-chip stocks are continuously traded. As a result, fund returns do not grow immediately, but they also don’t plummet easily either. Due to this, blue-chip funds deliver stable returns.
- A blue-chip fund is more secure than a mid-cap or small-cap fund because of its stability and liquidity. While these funds are also subject to market risks, they do not plunge suddenly. When stocks go topsy-turvy, returns can be negative, but this is rare.
Since blue-chip stocks are traded continuously, even if they dip for a while, they bounce back quickly and hardly disappear from the market. Because of this, these funds aren’t affected by market downturns.
Benefits Of Large Cap Funds
Large cap funds have several features that already indicate their benefits. Nevertheless, investing in large cap funds has some advantages from the investor’s point of view:
- A large cap fund allows investors to own shares in multiple large capital companies. One can earn returns by investing in various stocks in this way.
- The diversification of investments also reduces risk since even if one or a few stocks fail, the others will probably do well.
- The blue-chip sector offers stable returns over the long term since blue-chip companies are industry leaders and can withstand bear markets.
- Although blue-chip funds focus on large-cap stocks, they try to diversify by sector.
- Funds such as these are highly liquid, show consistent growth, and survive the market upheavals, making them an attractive investment option.
Who Should Invest In Large Cap Mutual Funds?
Large Caps are a good investment choice for those who want to make good use of equity investments without having their returns fluctuate over time. Large Cap funds are known for their stability, making them capable of withstanding bear markets.
Investing in large cap funds can give you that much-needed steadiness. So much so that you may even think about making them a large part of your investment portfolio.
Yet, the biggest problem with Large funds is that they might not meet expectations of return in the market compared to mid-cap or small-cap funds.
Considerations Before Investing In Large Cap Mutual Funds
Here are some things you should consider before investing in large cap mutual funds:
Risk And Return Of Large Cap Funds
A fund’s performance is affected by market conditions. As the scheme’s benchmark fluctuates, so does its Net Asset Value (NAV). Although large cap funds do not fluctuate much in value, they are less volatile than small-cap and mid-cap funds. This makes investing in large cap schemes a stable investment option.
However, these schemes typically yield lower returns than mid-cap or small-cap funds. If you wish to enjoy stable returns at lower risk, you should invest in large-cap funds.
Get To Know The Scheme’s Expense Ratio
Expense ratios refer to the fees charged by fund houses to manage your investments. In other words, it is the percentage of the fund’s assets that are used for administrative and fund management purposes.
In accordance with SEBI regulations, fund houses cannot charge an expense ratio greater than 2.50%. Despite this, since most large-cap funds have lower returns than mid-cap or small-cap schemes, you should choose a scheme with a lower expense ratio to maximise your profits.
Not For Short-Term Investors
Large cap mutual funds also underperform when the market slumps. In spite of this, since the money is invested in financially strong companies, the underperformance will average out over time.
Generally, if you stay invested for at least seven years, you can expect to earn 10-12% returns. Thus, large cap mutual funds are usually recommended to long-term investors.
Consider Your Financial Goals
The returns offered by large cap mutual funds are stable and carry a reasonable level of risk. Therefore, many investors turn to these schemes when planning their retirement investments. Large cap mutual funds are also preferred by investors who want exposure to equity markets without taking on too many risks. Before investing, it is important to think about your financial goals.
Tax On Capital Gains
The tax treatment of large cap funds is the same as that of other equity assets. The capital gains earned on holdings for as long as one year are known as short-term capital gains (STCGs). These are taxed at 15%. In contrast, long-term capital gains (LTCG) have a holding period exceeding a year. According to the prevailing tax rate, LTCG over 1 lakh is taxed at 10% without indexation.
An equity fund that invests in large companies is known as a large cap fund. Stocks of such companies are pioneers in their fields, with excellent operational management, steady cash flows, and strong balance sheets. Because of these factors, they are profitable businesses with large capitalisations and a good reputation. When times are good, such stocks deliver good returns. However, they can also provide good returns when the market is unfavourable. Large cap funds offer stable returns and high liquidity for investors with long-term investment horizons.
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