What are Large Cap Mutual Funds
21 May, 2024
Synopsis
Large-cap mutual funds focus on established companies with substantial market capitalisations and solid track records to provide stability and steady returns over extended periods.
These funds offer advantages such as reduced volatility, diversification across various sectors, and the potential for long-term wealth accumulation through compounding.
When you decide to buy a flat, you may lean towards a building constructed by a developer with a proven track record. Then you find out how many people have bought a flat there; this helps you gauge the response, which in turn may assure you about the quality of the flats. Even if the flat is slightly costlier than those offered by other developers, chances are you would go for it – brand, quality, track record, and the number of flat owners influence your decision. Similarly, in the stock market, there are companies with proven track records and a large number of shareholders. Such companies are popularly called ‘’big companies’’ and are technically referred to as large-cap companies. With such companies, shareholders go for consistent returns over a long period rather than high returns for a brief period.
What Are Large Cap Funds?
Large cap mutual funds invest predominantly in companies with large market capitalisation or large cap stocks. As per SEBI classification, large cap companies are those ranked from 1 to 100 based on full market capitalisation. These funds provide a relatively stable way to participate in the stock markets compared to mid and small-cap funds.
Why Should You Invest In Large Cap Funds?
Let's understand why large cap funds deserve a place in your portfolio:
Lower Volatility: Large cap companies tend to be leaders in their respective industries with strong financials, seasoned management and stable cashflows where their stocks are actively traded and less prone to wild price fluctuations. Large cap funds mirror this stability. Their NAVs fluctuate far less compared to small and mid cap funds. This makes them suitable for conservative investors.
Diversification: Large cap mutual funds hold between 20-30 stocks across various sectors. This diversification results in a balanced portfolio that can withstand economic and market cycles. Even if a few stocks underperform, other outperformers cushion the impact. The fund manager actively rebalances holdings to optimise returns.
Long-Term Wealth Creation: Large cap funds may not deliver outsized returns over short periods. But they compensate through the power of compounding over long investment horizons. While past performance doesn't indicate future potential, large caps offer a disciplined way to create wealth.
Ideal for Financial Objectives: Large cap funds are ideal for investment periods that are 5-10 years away, like retirement planning, children's education and house down payment. Their stable returns allow better wealth forecasting compared to volatile small and mid-caps. SIP investing helps benefit from rupee cost averaging and ride out interim volatility.
Reasonable Taxation: Capital gains from large-cap funds held over 12 months attract 10% long-term capital gains tax if gains exceed ₹1 lakh in a financial year. This reasonable rate compared to income tax makes them tax efficient. Dividends are taxed at the recipient's hand as per slab rates.
Superior Risk-Adjusted Returns: While small and mid caps may deliver higher absolute returns, large cap funds score higher on risk-adjusted returns. Risk-adjusted returns measure returns generated per unit of risk taken. Large cap funds provide steadier compounding with lower volatility.
How to Evaluate Large Cap Mutual Funds?
Some parameters to evaluate best large cap mutual funds:
Long-term performance across market cycles
Fund manager's experience and investment approach
Portfolio concentration and diversification
Downside protection ability during market declines
Expense ratio and exit load structure
How to Build a Core-Satellite Portfolio?
Investors must aim to build a core-satellite portfolio of best large cap funds to optimise returns:
Core: 70-80% in large cap mutual funds for stability.
Satellite: 20-30% in mid and small caps for growth.
This balances stability and higher return potential. Review portfolio periodically and rebalance asset allocation based on evolving investment horizons and risk appetite.
Large cap mutual funds offer a disciplined approach to equity investing. They combine the stability of large caps with the benefits of active management by seasoned fund managers. While small and mid caps hold higher risk-reward appeal, large cap funds provide a firm performance base. Maintain a balanced equity portfolio with large-cap funds as the core to meet your long-term wealth objectives with less volatility.
Download the HDFC Bank SmartWealth App to select the best large cap fund based on your financial objectives.
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