Category : Investing Guides August 14, 20245 minutes read
What is a large cap fund? A large cap mutual fund invests a majority of its corpus in stocks of large cap companies. They may have lower risks and higher liquidity. Additionally, investments in large cap funds may help investors diversify their portfolios. However, these funds may be subject to certain drawbacks – they may have lower returns and high tax implications. These funds may be suitable for risk-averse investors seeking a long-term investment. In this guide learn more about large cap funds, we’ll look at what they offer, their investment horizon and more.
Large cap meaning in India is defined by market capitalisation. Companies with a market capitalisation of ₹ 20,000 crore or more are known as large cap companies. To calculate market capitalisation, you have to multiply the current number of outstanding shares of a company with the current share price in the market.
There are 100 large cap companies in India as identified by the regulator. However, there are also some large midcaps whose market capitalization allows them to be considered as large caps that are usually on the radar of large cap funds.
Stability and reliability are the foundation of a large cap fund. They are likely to stay strong even in difficult market conditions and can be relied upon to make a full recovery. Large cap funds are relatively lower in risk compared to small and mid cap funds. Good large cap mutual funds that are well managed can minimize your risk and have the potential to give you above industry average returns.
Large and mid cap funds are both moderate to long-term equity investments with a similar level of risk. The key difference between large and mid cap funds is where the majority of their corpus is invested. A large cap fund will have around 65% or more of its investment in large cap stocks, whereas a mid cap fund will have a similar proportion in mid cap stocks. Companies with a market capitalisation of between 5,000 and 20,000 crores are known as mid cap while those with more than 20,000 crores are known as large cap companies.
Blue chip companies are among the top 100 companies on a stock exchange. The primary differences between a bluechip vs large cap is that bluechips are the leaders in their industries or market sector. Many of them are household names known throughout the country and have a long history of successful operations. It can be said that all bluechips are large caps, but not all large caps are blue chips.
What is a large cap fund’s most important value? Stability! Good large cap mutual funds are a suitable choice for the risk-averse investor who wants to generate wealth over the long-run. Large cap funds are also a useful tool for an investor who wants to diversify their portfolio for better risk management.
Introduction
Modern day investing has options for everyone, both big and small. The key to being a smart investor is to make a combination of investments that keep your money secure while also growing it at a rate that is higher than inflation. Keeping that in mind, what is a large cap fund‘s role in your investment portfolio? Large cap funds invest in stocks of well-known, firmly established companies. This makes them relatively secure investment options that do not easily lose their value.
The key to identifying large cap companies is to find out their market capitalisation. Companies with a market capitalisation of more than 20,000 crores are considered to be large cap companies. Market capitalisation is calculated by multiplying the number of outstanding shares issued by a company with the current price of a share.
Example – LCap Ltd has 25 crore shares outstanding and they are currently priced at 1,300 INR per share. This means LCap Ltd has a market capitalisation value of Rs. 32,500 crores, well above the 20,000 crore mark that defines what is a large cap stock.
A majority of good large cap stocks in the stock market today are known in some shape or form to the general public.
So what is a large cap fund? It is a fund that invests the majority of its corpus (fund value) into the equity shares of large cap companies. A good benchmark for a large cap equity fund would be 65% or more of its investment being put into the stock of large cap companies. Good large cap stocks are often steady and are not as heavily impacted by events like COVID-19 and new govt. policies like GST in comparison to small and mid cap companies. This security is what makes large cap mutual funds very popular among investors.
When it comes to investing, most people start with the stock of big cap companies. That is because it is easier for newer investors to understand the process when investing in familiar names and established businesses.
There are a lot of good reasons to invest in a large equity fund. What is a large cap fund’s core offering? Let’s find out!
Potentially Lower Risk
Indian large cap stocks are relatively secure and unlikely to fall sharply in value without a chance to recover. Large cap companies may be capable of handling harsher environments due to their size and the vast experience in their management teams. This makes them relatively low risk as they have plenty of reserves and can diversify their business easily when something is not going their way.
Highly Liquid
There is always a high demand for large cap stocks, therefore they can be easily sold off to free up capital to make other investments with greater strategic value. Even when prices are falling, large cap stocks may be relatively easier to sell since they are well-known and trusted in the market.
Invest in large cap funds and benefit from their potential low risk and high liquidity.
Diversification
A good investment portfolio usually has investments in a large cap mutual fund through lumpsum investment or SIP (Systematic Investment Plan). These stocks may potentially grow at a steady pace and help manage the risk of the rest of the investment portfolio so that the remaining funds can be used to target high-risk-return investments.
Explore the benefits of portfolio diversification
Large cap funds have several benefits including:
- Potentially Lower Risk: Large cap companies may be capable of handling harsher environments due to their size and the vast experience in their management teams. This makes them relatively low risk.
- High Liquidity: There is always a high demand for large cap stocks, therefore they can be easily sold off to free up capital.
- Diversification: These funds invest in a diversified portfolio of large cap companies.
In the long run, good large cap stocks are likely to stand strong in your investment portfolio, preserving what you have invested and growing it, but at a very slow, steady pace. If you’re looking for more short term profits or a faster growth rate, large cap mutual funds returns are unlikely to give you what you are looking for. Here’s why!
Slow Returns
Large cap companies have already grown to an enormous size and their stock values do not jump up very often. The market also keeps a close eye on good large cap stocks and it can be hard to find an opportunity to make a significant profit in a short period of time. The benefit of investing in large cap companies comes from their secure, but slow growth over an investment horizon of around 5-7 years.
Management Fees
Professionally managed large cap mutual funds charge fees, or an expense ratio to support the costs of fund managers, analysts and other support services. These fees come out of the funds earnings and a higher expense ratio means your profits are lower than they could be.
Taxes
What is a large cap fund‘s exposure to tax? Large cap equity funds are subject to Dividend Distribution Tax (DDT) as well as capital gains tax. Short term capital gains are taxed at 15% while long term capital gains above 1 lakh are taxed at 10% without applying the benefits of indexation.
Large cap funds may have certain drawbacks. These include:
- Slow returns: Large cap funds may have a lowered growth potential, causing slower returns.
- Management Fees: Professionally managed large cap mutual funds charge fees which may impact the overall returns.
- Taxes: Large cap equity funds are subject to Dividend Distribution Tax (DDT) as well as capital gains tax.
While they are excellent investment options, what is a large cap fund‘s unique value to investors? Different investors are looking to make their money work for them to achieve their own specific goals. So, who should be investing in large cap mutual funds?
Risk Averse Investors
Large cap mutual funds are suitable for investors who are risk averse. This means that they want to bear the minimum risk of losing their investment in the market. The stability of large cap companies make large cap mutual funds a suitable option for risk averse investors.
Learn more about the types of investors.
Diversify your investment portfolio by investing in large cap funds. Invest with Bandhan Mutual Fund!
Long-Term Investment
The ideal investment horizon for large cap equity funds is around 5-7 years. Investors should look to hold onto their investments for at least 3 years to generate potential wealth at a steady pace. If you are in need of quick returns, then large cap mutual funds returns may not give you what you need.
- Market capitalisation defines whether a stock is a small, mid or large-cap stock. The meaning of large cap mutual funds in India is a company with market capitalisation of more than 20,000 crores.
- Good large cap mutual funds are potentially secure, provide steady returns and are liquid.
- The disadvantages of large cap stocks is that their value increases slowly and they are still prone to losing value during bad market conditions.
- Good large cap mutual funds are a great way to diversify your investment portfolio to give it some potentially extra security and liquidity.
- The investment horizon for good large cap mutual funds returns is 5-7 years.
- The difference in bluechip vs large cap companies is that a bluechip company has established itself as an industry leader and/or household name with a strong reputation.
- A blue chip fund means a majority of the fund’s corpus has been invested in the stock of blue chip companies.
- Large cap equity funds are a suitable choice for long-term investors who do not want to expose their money to significant risk.
- Like all investment funds, good large cap mutual funds charge a service and/or expense fees to cover the costs of managing the fund.
- Large cap mutual funds returns are subject to taxes like Dividend Distribution Tax (DDT) and capital gains tax. Short term capital gains are taxed at 15% while long term capital gains are taxed at 10% without considering the benefits of indexation.
