What are Large Cap Mutual Funds?

Mutual fund investments are categorised based on the market capitalisation of the company and one category that stands out for its stability and consistency is large-cap mutual funds. These funds primarily invest in well-established companies with a substantial market capitalisation, often considered safer than mid-cap funds and small-cap funds.

This article aims to provide a detailed understanding of large cap mutual funds, including how they work, their features, advantages, disadvantages, and more.

What is a Large-Cap Fund? 

As the name suggests, a large-cap fund invests primarily in large-cap stocks. According to SEBI, large-cap companies are those ranked within the top 100 by market capitalisation. These companies are well-established with a strong track record of performance.

Due to their size and stability, large-cap companies are considered safer investments compared to mid-cap and small-cap companies. These funds are ideal for conservative investors who seek steady returns with lower risk compared to other equity funds.

Key Features of Large-Cap Funds

Here are some key features of large-cap mutual funds:

1. Large-cap funds allocate at least 80% of investment to large-cap stocks.
2. They are known for providing steady and consistent returns over the long term.
3. They carry lower risk than mid-cap and small-cap funds.
4. These funds are suitable for investors with a long-term investment horizon, as large-cap companies tend to provide stable growth over time.
5. They have a proven track record of delivering steady returns over the long term.

How do Large-Cap Funds Work?

A large-cap mutual fund operates on a simple principle: it pools money from numerous investors and invests it in a diversified portfolio of stocks from large-cap companies.

These funds are managed by professional fund managers whose primary role is to grow the fund's value over time. Their responsibilities also include:

Stock Selection: Identifying and selecting large-cap companies with strong fundamentals, growth prospects, and the potential to generate consistent returns.

Risk Management: Implementing strategies to protect the fund's assets from market volatility and other risks.

Portfolio Construction: Building a diversified portfolio of large-cap stocks to mitigate risk. This involves spreading investments across different sectors and industries.

Advantages of Investing in a Large-Cap Fund

Investing in the best large-cap mutual funds offers several advantages:

Relatively Lower Risk: Compared to small and mid-cap funds, large-cap mutual funds are generally considered less risky due to the stability of their underlying companies.

Steady Returns: They often have a history of consistent earnings and dividend payouts, leading to relatively stable returns.

Diversification: Investments in this fund provide exposure to a basket of blue-chip companies, reducing the impact of individual stock performance on your investment.

Liquidity: Large-cap stocks are highly liquid, allowing for easy entry and exit from the market.

Stability: Large-cap mutual funds invest in well-established companies with strong financials, providing stability to your investment portfolio.

Disadvantages of Investing in a Large-Cap Fund

While these funds offer stability compared to other equity fund categories, they also have certain drawbacks:

Lower Growth Potential: Large-cap companies are already well-established, which means their growth potential is often more limited compared to smaller companies. They may not offer the high returns that small-cap or mid-cap mutual funds can generate in a bullish market.

Market Risk: Despite being relatively less volatile, investing in these funds is not completely risk-free. Market fluctuations can impact the value of your investment.

Underperformance: There's no guarantee that a large-cap fund will outperform the market or other investment options.

Who Should Invest in Large-Cap Mutual Funds?

Large-cap mutual funds are well-suited for a variety of investor profiles:

Risk-Averse Investors: Those with a lower tolerance for market fluctuations may find these funds attractive due to their relatively lower risk compared to other equity fund categories.

Long-Term Investors: Large-cap funds have a history of delivering steady returns over the long term, making them suitable for investors with a long-term investment horizon.

New Investors: Beginner investors can consider these funds as a starting point due to their stability and potential for capital appreciation.

Core Portfolio Holdings: Large-cap funds can form the core of a diversified investment portfolio, providing a stable foundation for overall returns.

How to Choose the Best Large-Cap Funds?

Selecting the right large-cap mutual fund is crucial for achieving your investment goals. Here's a step-by-step guide to help you make an informed decision:

Understand your Investment Goals: Determine your comfort level with market fluctuations. Large-cap mutual funds are generally less volatile than mid or small-cap funds but still carry investment risk.

Define your time frame for investing. Long-term investors often benefit from the compounding effect of large-cap funds.

Analyse Fund Performance: Analyse the fund's historical performance to see how the fund has managed market ups and downs. While not indicative of future results, it can provide insights into a fund's consistency.

Look for funds that consistently outperform their benchmark indices over different time periods, such as 1-year, 3-year, and 5-year returns.

Consider the Expense Ratio: The expense ratio represents the annual cost of managing the fund. Compare the expense ratios of similar large-cap funds to ensure you're not overpaying for management fees.

Balance this fee with the fund's performance. Sometimes, a slightly higher expense ratio may be justified if the fund consistently delivers superior returns.

Check the Consistency of Returns: Consistency is key when selecting large-cap mutual funds. Look for funds that deliver steady returns across different market conditions. A fund that performs well in both bullish and bearish markets indicates a well-balanced and resilient portfolio.

This consistency can also reduce the volatility of your overall investment portfolio.

Factors to Consider Before Investing in Large-Cap Funds

Investing in large-cap mutual funds can be a strategic move for building a stable and diversified portfolio. But before you commit your money, you must evaluate several factors to ensure that these funds align with your financial goals and risk tolerance. Here are the key factors to consider:

Risk Tolerance: Large-cap mutual funds are generally less volatile than mid-cap and small-cap funds, but they are still subject to market risks. It's important to assess your risk tolerance before investing.

Long-term investment: Investment in large-cap mutual funds requires having a longer time horizon in mind. Since the money invested is generally in larger companies, an average of more than 5 years could potentially give your portfolio good returns.

Financial goals: Investors prefer large-cap mutual funds because of the low risk involved, they are largely suitable for long-term goals like retirement, etc.

Taxation on Large-Cap Mutual Funds 

Taxes on long-term and short-term capital gains and dividend distribution taxes are determined based on the holding period.

Short-Term Capital Gains Tax (STCG)

Taxes are levied on the gains incurred from selling the units within a year. STCG is taxed at 20%.

Long-Term Capital Gains Tax (LTCG)

A long-term capital gain tax is levied while selling the units held for more than a year. It is at 12.5%.

Dividend Distribution Tax (DDT)

Dividend incomes are added to the 'Income from Other Sources' and taxed based on applicable tax slab rates. A 10% TDS applies if annual dividend income exceeds ₹5,000. Investors can claim this tax deduction as a refund while filing returns.

How to Invest in Large-Cap Mutual Funds

You can invest in large-cap mutual funds through the issuing fund house or online platforms like INDmoney. Follow these steps to invest:

• Open the INDmoney app and log in with your credentials.
• Navigate to the "Mutual Funds" section within the app.
• Use the filter options to select "Large-Cap Funds" to view the available options.
• Decide whether to make a lump sum investment or set up a Systematic Investment Plan (SIP) for regular contributions.
• Enter your desired investment amount and confirm the transaction.