Large Cap Mutual Funds
Predictable and Efficient Returns
Investments in Stocks of Big Companies
Improved Market Cycles Handling
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LARGE CAP MUTUAL FUNDS
Large-cap mutual funds are the ones that invest a huge part of their corpus in companies with large market capitalization. The huge companies are the ones which have a reputation in the market and also a great track record. Such companies typically have stable corporate-governance practices and have created wealth for their investors, slowly and steadily over the long term. These corporate houses are normally among the most deeply followed and well-researched on the market. Mutual funds that invest a bulk of their investible corpus in these companies are labeled as large-cap funds.
Being seasoned players, the underlying companies in the portfolio of large-cap funds may be considered as almost steady compounders and regular dividend payers. On the risk-return spectrum, large-cap funds give regular returns with almost low risk. They are perfect for investors with a lower risk appetite. So, choose a long-term perspective, stay patient, and stay invested to get good returns over the long term.
The Securities Exchange Board of India (SEBI) has circulated the following guidelines on what criteria qualifies a company as a large-cap company.
- Ranks within 1 -100 in terms of full market capitalization
- A least of 80% assets in large-cap equity and equity instruments
- Market Cap of ₹ 20,000 Crores and beyond.
Eligibility criteria for Large-cap Equity Funds
Large-cap equity funds invest in large firms. They aim to offer better capital appreciation over the long-term and give dividends reasonably and regularly. Large-cap equity funds are an avenue for those who want to take benefit of equity investments but do not want their returns to vary more than the market. As they are financially stable, they are able of withstanding bear markets, though there’s a risk that the large-cap can underperform as distinguished from the mid-cap or small-cap equity fund.
Hence, the aim is to keep investing when the market is down to invalidate the effect of loss. By saying this, these funds are perfect for risk-averse investors who want equity exposure to high-quality stocks and have a long-term investment perspective. Large-cap funds depend on your investment horizon and risk/return objectives – an investment horizon of 5-7 years is suggested. This does not mean that these funds are free to any downturn, but are more likely to face a slowdown. So to encapsulate, if you want stability in your portfolio near the redemption horizon, then large-cap funds are fit.
How do Large-cap Equity Funds work?
Large-cap equity funds are the type of funds that invests a large part of their corpus in companies with huge market capitalization.
Large-cap companies are well-established players with a good track record, and they normally have steady corporate governance practices. Having created wealth for their investors slowly and regularly over the long-term, these corporate houses are always the most highly followed in the market.
Recently, SEBI’s categorization has changed the criterion to decide whether a company is large-cap, small-cap, or mid-cap. Large-cap companies are those that come in the top 100 ranks of the given benchmark. As linked to small-cap and mid-cap funds, these funds are less risky and maybe the perfect option for almost risk-averse investors. Being patient and having a long-term horizon may be a better investment strategy for large-cap funds.
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Benefits of Large Cap Funds
There are various benefits of investing in Large-cap funds:
Risk and Return of Large Cap Funds
All equity mutual funds are affected by market conditions. When the benchmark of the scheme fluctuates, the Net Asset Value (NAV) moves up or down too. However, unlike small-cap and mid-cap schemes, the NAV of a large-cap fund does not fluctuate a lot. Hence, investing in large-cap schemes gives resistance to your investment portfolio. The returns from these schemes are normally lower than the mid-cap or small-cap funds. Remember, you should invest in large-cap funds if you desire steady returns at a lower risk exposure.
Know the Expense Ratio of the scheme
The expense ratio is the fee charged by fund houses for managing your investment. It is the portion of the total assets of the fund which are used for official and other fund management purposes. The Securities and Exchange Board of India (SEBI) has mandated that fund houses cannot charge an expense ratio of more than 2.50%. However, since most large-cap funds generate lower returns in comparison with mid-cap or small-cap schemes, you should look for a scheme with a lower expense ratio to help you maximize your returns.
Not for Short-Term Investors
When the market slumps, large-cap funds also experience underperformance of their portfolios. However, since the money is invested in financially strong companies, this underperformance averages itself out over a while. The general understanding is that if you stay invested for more than seven years, then you can expect returns of around 10-12%. Hence, large-cap mutual funds are normally suggested to investors with a long-term investment horizon.
Consider your financial goals
Large-cap mutual funds carry a reasonable amount of risk and offer stable returns. Hence, many investors turn to these schemes when they are planning their investment for retirement. Also, investors who want to gain exposure to the equity markets without taking too many risks, prefer investing in large-cap mutual funds. It is important to consider your financial goals before investing.
Taxation on funds
Being equity funds, large-cap mutual funds are subject to capital gains tax and dividend distribution tax.
1) Dividend Distribution Tax (DDT)
When a fund house pays dividends, it needs to deduct DDT of 10% at the source before making the payment.
2) Capital Gains Tax
On redeeming the units of a large-cap fund, you get capital gains – which are taxable. The rate of tax depends on the holding period – the period for that you were invested in the fund.
- The capital gains received by you for a holding period of up to 1 year = Short Term Capital Gain (STCG) which is taxed at 15%.
- The capital gains received by you for a holding period of more than 1 year = Long Term Capital Gain (LTCG). LTCG up to Rs.1 lakh is not taxable. Any LTCG above this amount is charged at the rate of 10% without indexation advantages.
Parameter for selecting large-cap fund
Performance and risk analysis
This is to examine if the fund has shown flexibility in performance over various market periods with decent risk-adjusted returns.
Under this, you are required to rank the fund based on quantitative parameters like rolling returns over short-term and long-term periods, such as a 1-year, 3-year, and 5-year timeframe. Other factors are on risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over 3 years.
Performance across market cycles
You need to ensure that the fund can perform consistently across multiple market cycles. Therefore, analyze the performance of all the available large-cap funds vis-à-vis their benchmark index over bull phases and bear market conditions. A fund that performs well on both sides of the market must rank big on the list.
- Portfolio Quality
- Adequate Diversification
The scheme must not hold an extremely strong portfolio. The portfolio must be well-diversified and the exposure to the top-10 holdings should be ideally under 50%.
Quality of Fund Management
You also need to hold the fund manager’s experience, his workload, and the consistency of the fund house. Hence, assess the following criteria:
1) The fund manager’s work experience – He/she should have a decent experience in investment research and fund management, ideally over a decade.
2) The number of schemes managed – A fund manager usually manages multiple schemes. Thus, you are required to verify if the fund manager is not filled with a large number of schemes. If he/she is handling more than 5 open-ended funds, it should raise a red flag.
3) The efficiency of the fund house in managing your money – Research about the fund house’s consistent performance across schemes. Find out if only some selected schemes are performing strongly. A fund house that performs well across the board is an indication of sound investment processes and risk management techniques in place.
Difference between Large-cap, Small-cap and Mid-cap Funds
|Basic||Large-cap Funds||Small-cap Funds||Mid-cap Funds|
|Meaning||A large-cap fund is a type of fund where investment is made in majorly with companies of large market capitalization.||Small-cap is a term used to classify companies with relatively small market capitalization. A company’s market capitalization is the market value of its outstanding shares||Mid-cap funds invest in mid-sized companies. Stocks held in mid-cap funds are the companies that are still developing.|
|Role of the Fund Manager||Since these funds essentially invest in large-cap stocks, the fund manager requires to pick stocks based on the investment objective of the scheme. The information of these companies is simply available and their returns are normally stable. Hence, the fund manager requires to focus more on the right stock selection.||Investing in small-cap stocks needs a fund manager with experience in examining the small-cap sector. These companies are very volatile and lead to a rise or fall sharply within days. So, the fund manager requires to be in sync with the market at all times.||The information about the companies in the mid-cap funds is not very simple to come by. Therefore, the fund manager requires to research the companies well before investing. Also, come mid-cap companies are on the edge of becoming big. The fund manager requires to recognize these opportunities and make changes to the portfolio accordingly.|
|Risk Profile||These funds are estimated to be the least risky among the 3 since they invest in stocks of the top 100 companies. Usually, you can consider of the companies in the NIFTY 50.||These funds are the riskiest of the 3 as the companies in this have a low capital base. Despite the risks, these stocks give a high potential for growth.||These funds are riskier than large-cap funds but less risky than small-cap funds.|
|Who should invest in them?||Investors with a less risk tolerance looking for investment opportunities in the equity markets normally prefer these schemes. You require to have a long-term investment horizon. Also, it is suited for investors who are not asking aggressive returns.||These schemes are for aggressive investors with greater risk tolerance. Since the small-cap space is very volatile, these schemes are for investors who can stomach the volatility. In the long-term, you can foresee good returns. You must examine the fund manager well before investing in a small-cap fund.||Investors with medium risk tolerance and looking exposure to the equity markets favor these schemes. You require a long-term investment horizon and be satisfied with around 10% returns.|
|Market Capitalization||Exceeds Rs.20, 000 crores.||$2 Dollar or less||Rs.5, 000 crore or exceeding Rs.20, 000 crore.|
|Returns||These schemes do offer regular returns with less volatility. The average returns are 7% in the last 5 years.||Being the highest-risk schemes, they do offer a chance to get good returns the 5-year average has been 14.72%.||These schemes give better returns than large-cap funds the average 5-year returns are 10.28%.|
|Percentage of Investment||Open-ended, equity funds that invest at least 80% of their total assets in large-cap stocks.||Open-ended equity funds invest a least 65% of their total assets in small-cap stocks.||Open-ended, equity funds that invest about 65% of their total assets in equity and equity-related instruments of mid-cap companies|