There are three main categories of funds you can invest in - large-cap, small-cap, or mid-cap. You can make large-cap investments in big companies that are well-established and in deep-rooted market players with firm corporate governance and a strong reputation and credibility. SEBI has laid out principles and clear demarcations among all three categories, and its reclassification states all the changes that have been incorporated in all kinds of investment funds. Here we will learn about large-cap funds, how you can invest in them, their features, and benefits.
What is a Large-Cap Fund?
Large-cap mutual funds are investments in large-capitalization companies, which are the top 100 companies by market capitalization and stock market evaluation. A large-cap fund invests most of its Assets Under Management (AUM) in the stock of large-cap companies such as Britannia ITC and HUL, which have a high reputation in the market. These are ideal for investors with a low-risk intake and who can be confident investing in a company with a proven track record of medium- to long-term performance with the best large-cap funds.
Who Should Make an Investment in Large-Cap Mutual Funds?
These should be chosen for those who wisely utilize their equity investments and are not interested in volatile or highly fluctuating returns but desire stability in their investments. However, investors must remember that sometimes, even the best large-cap funds do not meet the expected return on the market compared to medium or small-cap stocks.
Large-cap funds can withstand market capitalization. These funds may also consider refocusing their investments to occupy a large part of their investment portfolio to add some coveted continuity (from an investor's perspective) to their investment profile.
Large-scale cap fund investments are suitable for those who want to diversify their portfolio with major companies in the market sector. If one sector doesn’t meet your expectations, the other sector will instantly compensate and reduce the adverse effect.
Since these funds are aversive to volatility and are low on risk, they provide low revenues compared to small and medium-sized companies. It is a great investment scheme for the new beginners who have just started learning about the market.
Taxability of Large-Cap Mutual Funds
They are inevitably taxed as other equity funds. Until the budget of 2020, the dividends arising from investments in large-cap funds were tax-free as the fund houses were required to pay the dividend distribution tax (DDT) before giving out the required dividends to investors. Budget 2020 changed this law by regaining the classical nature of the taxation of dividends in the investor's hand. Dividends provided by investment funds are added to their total income and are taxed according to their income tax slab.
Taxation of capital interests provided by equity funds depends on the retention period. You can achieve short-term capital gains within a one-year holding period by selling the fund's shares. These profits are taxed at a fixed rate of 15% regardless of the type of income tax. After a one-year holding period, selling equity fund shares gives you long-term capital gains. These profits of up to Rs. 1 lakh per year are tax exempt. Profit exceeding this limit is taxed at a tax rate of 10%, leaving no benefit of indexing.
Risks Associated with Large-Cap Mutual Funds
Large-cap funds are equity funds and carry the same risks as other equity funds. The following risks are related to large-cap funds:
- Market risks – There is always a risk of poor market performance, which can take place because of external and internal influences like geopolitical and economic factors.
- Credit risk – This is a risk when the security is due. In this case, the issuer may not be able to repay the principal amount or meet its promise to pay out the interest.
- Interest rate risk - Rising interest rates can move the price of securities in the opposite direction. These interest rates depend on the availability of credit from the issuer and the demand for it in the market.
- Liquidity risk – This is a danger wherein the fund manager may have to sell securities because they were unable to make profits due to a shortage of buyers.
- Concentration risk – There is a potential for huge losses, primarily when investing all your stocks in one particular company or sector. Like they said, never put all your eggs in one basket.
Factors to Consider Before Investing in Large-Cap Mutual Funds
1. Study the investment risk
Large-cap funds are exposed to various market-specific risks, which are usually fairly moderate. The Net Asset Value (NAV) fluctuations are minor compared to small or medium-sized funds.
2. Don’t forget to compare the cost ratio
Like all investment trusts, large-cap investment trusts come with costs, so your investment is well managed. This is known as the fund's cost ratio. Lower cost ratios help offset a higher net income.
3. Consider the investment period
Large-cap funds are ideal for those considering medium- to long-term investments. Individuals investing in these funds must have been invested in them for at least 3-5 years to assess the potential return of the offer.
4. Understand your investment goals
Make sure your fund's goals complement your individual goals. You should be aware of the experience and style of the fund manager to learn more about fund performance.
5. Study the past performance
When deciding to invest in a large-cap fund, it is important to analyze its past performance. Select a fund whose number was kept constant throughout all market conditions and cycles.
6. Know everything about the fund manager
Experienced fund managers play a critical role in return yield. When the market looks promising, your fund manager can guide you to move the capital from one area to another or maybe increase your investments at a particular time in a particular industry. Fund managers have their professional know-how in the field. They can use their industry knowledge, experience, and expertise to guide you and help you invest more towards secure investments that generate better returns.
7. Learn about the exit load
This is the cost that investors incur directly. Exit load is a part of the NAV and matters the most when it comes to saving. Low exit loads result in higher returns.
Why Invest in Large-Cap Mutual Funds?
Large companies are reputed and credible because of which they generate stable revenue. Therefore, the biggest advantage of investing in a large-cap fund is the low risk and stability that it can provide. Large-cap mutual funds are not significantly affected by market fluctuations and show low volatility compared to middle and small-cap funds.
Initially, the returns may seem low for the short-term period, but a large-cap fund has better returns in the long run. This is because investors are more secure with these investments during a recession or a market/business field downfall.
How to Invest in a Large-Cap Fund?
Investing in a large-cap mutual fund is easy. Simply follow the steps mentioned below:
Step 1 - You can register online using your personal details and select the large-cap fund you want to invest in.
Step 2 - Select your favorite type of investment, and you can pay towards it. If you need to do an e-KYC, you must do it using your identity proof, address proof, age proof, and other financial details.
Step 3 - You must also submit your bank account details and PAN number while investing in the fund that interests you.
Step 4 - Finally, you can click on invest and select the chosen tenure of the investment and its type - whether it is a SIP or a lump sum payment. You can also choose the appropriate mode of payment and complete the transaction to initiate your investment.
Advantages of Investing in a Large-Cap Fund
Large-cap funds have many advantages, and investors can benefit from such investments made in companies that have performed well in the past. Here are some of the advantages of investing in large-cap funds:
1. Investment stability
With sound business plans, these companies are financially stable, so their growth and revenues are consistent. Therefore, it is unlikely that a large venture will default due to market conditions. They are unaffected by fluctuations and provide portfolio stability. In addition, large organizations pay dividends, contributing to the wealth accumulation of investors.
2. Better capital appreciation
The large-cap program invests in promising companies famous for their high performance, so mutual fund prices do not fluctuate much. Thus, they can better provide investors with years of capital growth.
3. Sound investment decisions
Large companies have been established and have operated for a long time, so you can easily avail specific details about these companies like profitability, experience in investment, financial statements, operations, etc.
4. High liquidity
Another advantage is that large-cap stocks provide sufficient liquidity. Therefore, it is easy to liquidate your funds in a disadvantaged portfolio without suffering losses. This can be important for unstable strains.
5. Resist recession
Large-cap products thrive during the uptrend and can endure market turmoil. It's a great way to survive a recession without compromising your business outlook.
6. Diversification across multiple sectors
The large-cap segment is a great option to diversify beyond market capitalization since you’re investing in blue-chip organizations. In addition, investors do not have to invest in all sectors or continuously supervise performance.
Large-cap funds are recommended for investors, particularly beginners, seeking consistent returns with low risk. Success in large-cap mutual funds depends on the scope of your investment and the period. It is suggested to go for a long-term investment, at least 5-7 years. Investors looking for higher risk and greater returns should go for medium-sized or smaller funds.