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Large Cap Mutual Funds

Finding the right scheme is an important task as choosing a fund randomly might lead to you not achieving your goals at the right time. Choosing one mutual fund scheme out of all the options out there is a herculean task. Understanding the basics of mutual funds is crucial before you choose the one that is right for you and your investment needs.
We have written a detailed article about mutual funds and how they work. If you are also interested in learning more about the terminologies that are used in the world of mutual funds, you can read our other article which focuses solely on that. In this article, we are going to dive deep into one type of equity mutual fund scheme, called Large-Cap Mutual Funds. An ideal investment option for newbies and experienced investors alike, Large-Cap Mutual Funds should be in every investor’s portfolio. Now, let’s learn more about them in detail.
Large-Cap Mutual Funds are a type of equity mutual fund, which comes with low risk and is suitable for risk-averse investors. This article will give you detailed information on what large-cap mutual funds are, how they work, who is it suitable for, the benefits of investing in them, and the factors that you should consider before investing in them.

What Are Large-Cap Mutual Funds?

Large-cap mutual funds invest a major portion of their total assets in companies with a high market capitalization. These companies carry a strong reputation and have a proven track record of offering wealth to investors over an extended period of time. According to SEBI, large-cap companies fall in the top 100 list of firms by market capitalization.
Large-cap funds have the potential to give consistent dividends and stable wealth accumulation. These schemes have a lower risk profile when compared to small or mid-cap funds and can withstand a slowdown in the markets. Large-cap funds also offer the opportunity to offer more consistent returns. However, the returns will be lower compared to mid-cap or small-cap funds.

What Are The Features Of Large-Cap Mutual Funds?

Here are some of the key features of large-cap mutual funds.
  1. Large-cap mutual funds invest in the top 100 companies in terms of market capitalization.
  2. Since large-cap funds invest a major portion of their assets in blue-chip stocks, they are easily traded, even in tumultuous times due to their reputation, quality, and reliability, making them highly liquid.
  3. While there is no instant growth in fund returns, they do not decline in value easily as well. Since they offer relatively stable returns over longer periods.
  4. Large-cap mutual funds are safer when compared to mid-cap and small-cap funds due to their stability and liquidity.
  5. You need to pay exit load charges for large-cap mutual funds, which will be applicable at the time of the redemption. The exit load will vary from fund to fund. Usually, redemption charges are 1% of the redeemed amount when the redemption is done within the period of 12 months from the date of investment.
  6. Returns from large-cap funds are taxable as per the applicable Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG) tax, depending on the holding period of the investor.

How Can You Invest In Large-Cap Mutual Funds?

There are two investment modes through which an investor can invest in mutual fund schemes. They are
  1. Lumpsum - You choose lump sum if you wish to invest one time in a mutual fund scheme. Usually, people choose this method when they receive a bonus, so they can put the money in a scheme as a one-time investment.
If you wish to know how much and how long you need to invest to achieve your goals, please check the Lumpsum Calculator, created by Koshex.
  1. Systematic Investment Plan (SIP) - You choose SIP when you want to invest a fixed amount in a scheme at regular intervals. You can choose to invest ₹5000 every month or ₹10,000 every quarter. When the due date comes, your amount will be deducted automatically from your bank account and it will be used to purchase units of the mutual fund scheme.
If you wish to know how much you need to invest every month via SIP to achieve your goals, please check the SIP Calculator, created by Koshex.

Who Should Invest In Large Cap Mutual Funds?

Large-cap funds are preferred by those who are looking for stability in their investments. They are a good option for investors, who are looking for a short-term investment option. However, they might not earn you that much returns when compared to the returns offered by mid or small-cap companies. On the other hand, large-cap mutual funds will not witness any decline in market capitalization because of longer-term investment horizons.
Large-cap mutual funds are also suitable for those who are looking to diversify their portfolios if their portfolios already have a lot of high-risk assets. If your investment in one sector doesn’t meet your expectations, you could invest in other sectors and reduce the negative impact. Since large-cap mutual funds are less risky and less volatile, they are an excellent option for new investors.

What Are The Benefits Of Investing In Large Cap Mutual Funds?

There are several benefits to investing in large-cap mutual funds. Here are some of the benefits listed below:

Investment Stability

Large-cap mutual funds invest in financially strong companies, which have proficient business plans, consistent growth, higher revenue, and regular income. They have low chances of facing insolvency because of economic circumstances. Large companies also provide a dividend, helping in the steady wealth creation of the investor.

Capital Appreciation

As we have mentioned before, large-cap mutual funds invest in blue-chip companies, which are known for high performance and stable earnings. Hence, they have the potential to provide capital appreciation to investors over a period of time.

Making Good Decisions

Large-cap companies are well-established companies, which have been operating for many years. This means, that investors can obtain details about their operations, financial statements, and profitability levels easily. The transparency offered by these companies makes it easy for investors to make informed investment decisions.

High Liquidity

Large-cap mutual funds offer a sufficient amount of liquidity. Hence, it is easy to redeem in an adverse market without impacting the prices and causing any considerable loss. Fund managers can buy and sell high-cap stock whenever they need to in order to maximize returns.

Withstand Recession

Large-cap stocks have the potential to withstand the ups and downs of several market cycles. Apart from thriving during a bullish run, they can also endure market turbulence. It can handle the economic downturn and recover quickly without affecting business prospects.

Multi-Sector Diversification

Large-cap mutual funds are a great option to diversify beyond market capitalization since you are investing in blue-chip companies. On top of that, you don't have to invest in all sectors or constantly monitor their performance.

Management Quality

In any company, the management team plays a huge role in its progress and success. Usually, the board of directors of large-cap companies are industry veterans with decades of experience. They hire high-quality leaders for the CEO, CFO, and COO positions. As the management team is responsible for the long-term direction of the company, any senior-level appointments are observed with keen interest by investors. The broad skills and experience of the management team instill confidence in investors about the long-term prospects of the organization.

Dividend Payouts

Large-cap stocks may provide consistent dividend payout over a period of time. This can negate the low returns from small-cap stock, making large-cap funds a must for a diversified investment portfolio.

What Are The Factors You Should Consider Before Investing In Large-Cap Mutual Funds?

There are a few factors you should consider before investing in large-cap mutual funds. They are as follows:

Risk & Return

The net asset value (NAV) changes along with the scheme's benchmark. However, the NAV of large-cap funds doesn't fluctuate too much. Therefore, when you invest in large-cap mutual funds, you bring stability to your investment portfolio. On the other hand, you may receive lesser returns than mid-cap or small-cap mutual funds.

Consider The Expense Ratio

Like every other mutual fund, large-cap funds also come with an expense ratio. It represents the portion of the fund's total assets that are used for administrative and other fund management functions. According to SEBI's mandate, fund houses are prohibited from charging expense ratios greater than 2.50%. It is important to choose a fund that has a lower expense ratio so that you can get higher returns.

Know The Investment Period

Large-cap mutual funds are ideal for those who are considering medium to long-term investments. They underperform during market downturns but the underperformance averages itself out over time, as the money is invested in financially strong companies. Hence, large-cap mutual funds are often recommended to investors who have long-term investment horizons.

Your Financial Goals Matter

Your mutual fund's goals should complement your individual goals. You should know the experience and style of the fund manager to learn more about the fund's performance.

Learn The Past Performance

Before investing in any mutual fund, it is important to examine its past performance. So, choose a fund whose performance has been consistent throughout all market conditions and cycles.

Know About Your Fund Manager

Fund managers play an important role in a fund's success. When the market is rising, your fund manager can help you move the capital from one area to another or increase your investments at a particular time in a particular industry. Fund managers use their industry knowledge, experience, and expertise to help you invest more toward safe investments that generate better returns.

Read About The Exit Load

Exit load is a part of the NAV and this is the cost that investors incur directly. This cost matters the most when it comes to saving, as low exit loads result in higher returns.

What Is The Taxation Of Large-Cap Mutual Funds?

Large-cap mutual funds are taxed similarly to other equity mutual funds. Until the budget 2020, the dividends from large-cap investments were tax-free as the fund houses had to pay the Dividend Distribution Tax (DDT) before disbursing the necessary dividends to investors. But now, investment fund dividends are included in the investor's total income and taxed in accordance with their income tax bracket.
Apart from the above, if you redeem your fund’s units within a year of purchase, you would have to pay a short-term capital gains tax. The short-term capital gains are taxed at a flat rate of 15%.
If you redeem your investments from equity funds after holding for a period of a year or more, you would have to pay long-term capital gains tax. However, profits of up to ₹1 lakh are exempted from taxes. If the profits exceed ₹1 lakh, they are subject to a 10% tax rate, leaving no benefit of indexing.

In The End…

Large-cap mutual funds are an ideal investment option for investors who want to dabble in the stock market but don’t want to take too many risks. They can also be a great investment choice to diversify one’s portfolio. We hope this article helped you understand all about large-cap mutual funds and how they can help you achieve your goals. It is important to learn how large-cap mutual funds will benefit you and what factors you should consider before investing in them.
If you wish to learn more about other types of mutual funds, including ELSS funds, and other types of investment instruments, such as Fixed Deposits, Digital Gold, and Smart Deposits, head over to our Blogs section. You can also check out our Calculators, where you can learn more about how much wealth you can accrue in certain years.
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