Large Cap Funds

What are Large Cap Funds?

Large-cap Fund is a good starting point in mutual fund investment, which has a lower risk but can generate higher returns. If you are new to the arena of investments, you might find it intimidating to choose suitable equity funds for you.

Large-cap funds are equity funds that invest a large proportion of the corpus under blue-chip companies with a large market capitalization or size like Reliance, TCS, ITC, etc. These companies are leaders in their fields and have a stellar reputation and a consistent track record of high profits on investment (in extended periods).

Who Should Invest in Large Cap Funds?

Mutual funds are categorized as large-cap funds, mid-cap funds, and low-cap funds according to the market capitalization of companies. Large-cap funds invest most assets in top-notch companies with stable growth and are not severely affected by market changes. As a result, large-cap funds offer steady returns, good capital appreciation in the long run, and regular dividends.

  • Therefore, it is the ideal investment avenue for risk-averse people or people who do not want their returns to fluctuate significantly, like investors new to equity funds.
  • A large-cap fund is also ideal for people willing to invest their assets for a long-term window, like people planning investments for their retirement.
  • However, it is also essential to keep in mind that large-cap fund returns are low. So only invest in these if you want stable compounding of assets at minimal risks.
  • Since large-cap fund returns are comparatively lower than other mutual funds, it is best to hold them for a minimum of 3 to 5 years. Thus, large-cap funds are best for people who have surplus cash with them.
  • Large-cap funds are also a good investment option for people who want to take advantage of market fluctuations but do not wish to engage in high-risk investment options.
  • It is also critical to keep in mind that a tax of 15% is levied on your capital gains from large-cap funds if you hold your funds for less than a year. Hence, it is not a good option for people with short-term investment goals.

Taxability of Large Cap Funds

Dividend Distribution Tax

Large-cap funds are subject to Dividend Distribution Tax like any other equity fund. Fund houses deduct a 10% DDT when paying the fund’s dividends.

Capital Gains Tax

When you dissolve your funds, tax is deducted on the capital gains. However, the tax percentage is determined by the holding period.

  • If you dissolve your funds within one year, the capital gains are taxable under Short Term Capital Gain at 15%.
  • However, the capital gain is taxed under Long Term Capital Gain for a holding period longer than one year. The capital gain is tax-free up to 1 lakh, beyond which it is taxed at the rate of 10% without any indexation benefits.

It is best to conduct thorough research before investing in large-cap funds because even the best large-cap funds are subject to market volatility and the taxability of these funds is moderately high.

Risk Involved With Large Cap Funds

  • Like any other equity mutual fund, market changes affect large-cap funds. However, these risks are relatively low.
  • The Net Asset Value (NAV) of a large-cap mutual fund does not fluctuate much, compared to small-cap or mid-cap funds, even in economic recessions since blue-chip companies are financially stable. Hence, these funds lend your investment portfolio the needed stability.
  • Moreover, these top-tier companies belong to the range of top 100 companies based on market capitalization, have a stable administration, sustainable business practices, and exhibit substantial growth yearly. Hence, there is a significantly low chance of your investment getting corroded. Of course, there is always the risk of returns dipping during a lower market performance (during the bear phase), but they are recovered in the long run.
  • It is imperative to keep in mind that although large-cap funds offer low risks, in terms of returns, they are not too high or profitable as compared to mid-cap and small-cap funds. However, unlike other mutual funds, large-cap funds are built to handle the stock market’s volatility, and hence they are low-risk investments. It is essential to reiterate that all investments come with a certain risk.

 Advantages of Large Cap Funds

  • Large-cap ventures have steady revenue generation with sound business plans. Hence, the chances of your large-cap funds plummeting are slim. These funds offer stability to your investment profile.
  • The stock prices of blue-chip companies do not fluctuate significantly. Thus, such companies offer better capital appreciation to their investors.
  • Top-tier companies can endure market turbulence (bear market). Therefore, large-cap funds can sustain even in times of recessions.
  • Large-cap funds also offer good liquidity, which helps you manage your investment portfolio without causing significant loss even during adverse market conditions.
  • Large-cap ventures are well-known companies that publish clear business goals and financial statements every year. Therefore, it is easy for investors to study its data and decide if it is a good fit.
  • People new to the domain of investments with a low-risk appetite and without much knowledge of market performance can benefit by investing in large-cap funds (top-tier companies).

In a nutshell, investment is subjective. We have discussed large-cap funds in detail to illustrate the risks and benefits. Risk and returns are two scales of investment. Pick your equity mutual fund depending on the parameter that tips your scale.