Large Cap Mutual Funds

Large cap mutual funds invest in the top 100 companies in India ranked by their market capitalisation. This means that this category of equity mutual funds invest in brands that are household names and have a strong recognition. Let’s look at the best large-cap mutual funds, should you invest in one and how can you choose which fund to invest in?

Best Large Cap Mutual Funds

List of the top-performing large cap mutual funds sorted by returns with their AUM and Expense Ratio.

What are Large Cap Mutual Funds?

As the name suggests, a large-cap fund invests primarily in large-cap stocks. According to SEBI (Securities and Exchange Board of India), large-cap companies are those that rank within the top 100 by market capitalisation. These companies are well-established with a strong track record of performance. 

These funds are required by SEBI to invest at least 80% of their investments in equity and equity related investments in large cap companies. Large cap companies include popular names like Reliance, TCS, Nestle, Colgate, Coal India, Britannia, etc. 

Large cap funds are great to form the core of your equity mutual fund portfolio. Due to their size and stability, large-cap companies are considered safer investments compared to mid-cap and small-cap companies. 

How do Large Cap Mutual Funds work?

Ever wished you could invest in the biggest companies in India? Large-cap mutual funds help you do exactly that without researching these stocks individually. Let’s understand how investing in this mutual fund works. Say, you want to set up an SIP of ₹5000 every month in a large cap fund. Let’s see what happens behind the scenes.

Investors with an intent similar to yours would invest different amounts whether in a lump sum or SIP to a large cap fund. The fund manager of this fund would now have a pooled corpus to deploy. The fund manager uses his expertise to research and pick the best stock to invest in. The primary objective is for the fund to give good returns or beat its benchmark performance. So, for a large-cap mutual fund, the benchmark could be NIFTY 50.

Now, the fund manager would deploy the total corpus including the ₹5000 you’re depositing every month into different large-cap companies. You would then be allocated units on the basis of that day's NAV (Net Asset Value). Now, through this mutual fund, you indirectly hold shares of different large-cap companies. If these investments perform well, your NAV grows. If it’s an active fund your fund manager also actively sells and buys stocks, based on market conditions and looks to beat the benchmark. If you wish to sell you will be cashed out on the basis of the NAV of that day.

Should I invest in Large Cap Mutual Funds?

To analyse if large cap mutual funds are the right investment option for you, you should first define your investor profile. This is a simple exercise for you to understand what your financial goals are, ask yourself these questions:

• What are you investing for? (Retirement, child's education, wealth growth, etc.)
• Do you prefer high returns with high risk or stable returns with low risk?
• How soon do you need access to your invested money?
• How do you react to market fluctuations? (Calm, worried, panicked)

Once you’ve defined this, you know where you stand as an investor. Now, understand the features of large-cap mutual funds and see if it matches your investor profile. We’ve summarised a few points that match people who are more likely to invest in large cap mutual funds.

1. You prefer lower-risk vs. mid and small cap: When we talk about large-cap funds we know we’re talking about companies that have huge market capitalisation. This indicates the value of the fund will not fluctuate heavily and can offer relatively stable returns vs. mid and small cap mutual funds.

So for instance, if you are someone who gets anxious with market fluctuations or when your portfolio takes a dip, large cap funds might be a good addition. However, to specify, let’s not confuse this with a no-risk fund. Mutual funds are subject to market risk and your asset value will fluctuate.

2. You think long-term: Large-cap mutual funds experience fluctuations depending on market conditions but the volatility will not be much. This is both a boon and a bane since these funds typically aim to provide stable returns than mid-cap and small-cap funds over a longer period of time and with time, they can compound incrementally.

3. You invest in market leaders: Large-cap funds are undoubtedly a good choice for people who believe investing in renowned companies that are market leaders in their segment. These funds typically include household names and market leaders across industries, such as Berger Paints, Britannia, Havells, Titan, and Dabur. Investing in these companies offers confidence in their continued performance and resilience, making large-cap funds a popular choice for conservative investors.

How to choose the best Large Cap Mutual Fund for my portfolio?

There are several large cap mutual funds in the market, choosing where to invest can be a tough choice if you're unsure about the right metrics you should look out for, here’s a step-by-step process of what factors you need to consider before investing in a fund:

1. Check the funds performance vs. the benchmark . Every fund has a benchmark index against which it is measured. For large-cap mutual funds, the benchmark typically is NIFTY 100 TRI or BSE 100 TRI. 

When a fund underperforms in comparison to its benchmark, it may not be a good signal. It often signals poor fund management or improper risk alignment, which means the fund manager may have been too conservative or too aggressive. A mutual fund whose performance is at par or more than its benchmark performance is a good metric.

Note that in case of passive large cap funds or Index funds that track a large cap benchmark, you should check the tracking error. For passive funds, the objective is to mirror the benchmark performance as closely as possible. 

2. Look at the Alpha, Beta, Sharpe Ratio, Standard Deviation and Sortino Ratio of a fund.

3. Consider the expense ratio of a mutual fund. 

4. Lastly, look at the fund manager who is managing your funds. 

We have explained in further detail how to choose an equity mutual fund here.

What are the benefits of investing in a Large-cap Mutual Fund?

Large-cap mutual funds invest in companies that are established and are relatively less risky than a mid-cap or small-cap fund. Let’s look at the key benefits for an investor looking to invest in a large-cap fund:

1. Reliable Growth

Companies in these funds have a track record of offering steady growth in the medium to long term. They are big players that have stood through the volatility of the stock market. This means they are perfect for risk-averse investors.

2. High Liquidity

Unlike mid-cap or small-cap, Large-cap mutual funds are traded in high volume in the stock market. This means if a proportion of investors were to withdraw their investments from the fund, they would easily be cashed out without affecting the value (NAV) of their investments.

3. Dividend Income

Companies in the large-cap category are also known for distributing dividends consistently. This means that apart from capital appreciation, you can also benefit from dividend income.

Difference between Large Cap, Mid Cap and Small Cap Mutual Funds

The primary difference between large-cap, mid-cap and small-cap mutual funds is in their market capitalisation. SEBI has categorised funds on the basis of their market capitalisation. Companies ranking between 1 to 100 are large-cap mutual funds, those ranging from 101 to 250th are mid-cap and those beyond 250th are small caps.

Large-cap companies are established and bigger companies. While mid-cap are in their growth phase, small-cap companies are still establishing and in their scaling stage. Their size and nature of business is also reflected on how they react to market volatility. Large-cap funds are relatively stable and less risky than small-cap and mid-cap mutual funds.

Here’s a summary of the key differences:

How much tax do I have to pay on Large-cap Mutual Funds?

Taxes are implied depending on how long you’ve held your large-cap mutual funds. If you sell your mutual funds within 12 months, you’re required to pay a short-term capital gain (STCG). 

On the other hand, if you’ve held your mutual funds for more than 12 months, you’re liable to pay a long-term capital gain (LTCG) tax. 

You can read the tax implications in both scenarios for equity mutual funds here