What is a Large Cap Fund in India? Features, Benefits & More

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.

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.

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.

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.

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.