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Understanding Large Cap Funds and Making a Smart Investment Choice

Large Cap Funds: Features, Benefits and Factors to Consider Before Investing

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If an investor to looking to make a long-term investment, experts always suggest that one opts for equity investments like Equity Mutual Funds. However, there are multiple types of equity Mutual Funds that an investor can choose form. One popular type of mutual fund in the equity category is the large cap equity mutual fund or the large cap fund.

In the following sections we will discuss key aspects of these equity mutual fund schemes such as large cap fund definition as per SEBI, benefits of large cap schemes and factors to consider before opting for this investment. 

What are Large Cap Funds?

The currently accepted definition of large cap schemes in India is as per SEBI's guidelines. According to this large cap funds are equity schemes that have to invest at least 80% of their investible assets in large cap equity stocks or equity derivatives. Large cap equity stocks refer to the top 100 stock-market listed companies in India ranked on the basis of free-float market cap.

The portfolio of this type of mutual fund is usually actively managed i.e. the fund mana and management team are responsible for selecting and investing in the stocks included in the portfolio. However, some passively managed index funds like those based on the Nifty 50, Sensex 30 and Nifty 100 Indices can be considered as large-cap funds too.  

Features & Benefits of Large Cap Funds

Now that you understand the meaning of large cap funds, let’s discuss the key features & benefits of the large cap mutual funds:

  • Potential for Lower Investment Volatility

The companies that a large cap fund invests in are typically well-established and financially sound with significant market share in their chosen industry. Therefore, the odds of insolvency due to adverse economic circumstances are lower so large cap funds tend to less impacted by market fluctuations.

  • Good Possibility of Long-Term Capital Appreciation

Large cap mutual funds invest in well established companies that can offer consistent long-term growth through stable earnings. This is the key reason why some investors tend to prefer large cap equity funds as an investment that can potentially offer long-term capital appreciation.

  • High Liquidity

The investment of large cap funds is usually made in stocks that are traded in large volume on the stock market. This ensures high liquidity of the investment i.e. the portfolio constituents of the scheme can be bought and sold easily of the secondary market. High liquidity of large cap fund investments means that the investment can be easily withdrawn in an emergency.

  • Multi-Sector Diversification

Large cap equity funds including Index Funds usually follow a sector-agnostic approach i.e. they invest in multiple sectors. This ensures that your investment features multi-sector diversification. This can reduce the overall risk of the investment and potentially increase the benefits as well as profits for the investor in the long-term.  

Who Should Invest in Large Cap Funds?

It is an ideal choice of equity funds for those willing to stay invested long-term but want to control the overall potential risk of the investment. Large cap mutual funds are known for having a good track in controlling losses and withstanding the potential negative impact of bear markets.

Experts typically recommend large cap schemes be included in the portfolio of investors who wish to create wealth over a long period but are unwilling to put their investment at high risk and volatility. However, though potentially low on risk as compared to other types of equity funds, large cap funds do carry some degree of risk and the returns from this investment are not guaranteed. 

What to Consider Before Investing in Large cap funds? 

Large cap funds sound pleasing to investors considering the consistent returns and low risk they offer, but here are a few points you should consider before investing in large cap funds.

Investment Risk

Similar to other equity funds, large cap mutual funds are prone to risks that come into the market. But they are mildly affected by these risks. Therefore, type of investment is ideal to invest in them to leverage their stability. They outperform during a slump, and as a result, they will bring great stability to your investment portfolio.

Expense Ratio

Like all other equity funds, large cap mutual funds come up with an expense. The expense ratio of a fund ensures your investment is well managed. A low expense ratio means that you get higher take-home profits. It charges a fee since a fund manager manages your expenses. The expense ratio in large cap funds is the average asset under management percentage. As per SEBI, the upper limit of the expense ratio for equity schemes like large cap equity funds is 2.50% annually.

Investment Horizon

To get the best returns from large cap funds in India, you need to invest in the long term, maybe five years or more. It helps us to realize the potential of returns on our investment.

Tax on Capital Gains 

The tax on mutual funds in the large-cap category is the same as other equity mutual funds. You can earn capital gain when you redeem your large-cap equity fund units. The Short Term Capital Gains (STCG) rate for large cap equity mutual funds is 15% of gains and Long Term Capital Gains (LTCG) tax rate is 10% of gains on incremental equity gains exceeding Rs. 1 lakh in a financial year.

Financial Goals 

Large-cap equity funds are ideal for achieving long-term goals. These funds keep a check on the erosion of fund value during a market slump. Large cap funds in India are ideal for you if you are a new investor aiming at safe exposure to equity funds. But always be assured of the risks involved when building a portfolio around these funds.

Frequently Asked Questions (FAQs)

1. Which type of mutual fund gives a higher return?

Higher returns come at the cost of high risks. Thematic funds can offer the highest returns but as they primarily invest in a single sector or theme, they often feature a high degree of investment risk.

2. Which is better - FD or mutual fund?

FD and Mutual funds are very different investment options. Fixed deposits provide assured returns, but the rate of return is often quite low. Mutual funds, on the other hand, typically offer inflation-beating returns, but returns are not guaranteed. So, neither can be called a better investment and the choice depends on the investor’s goals.

3. Can an investor get monthly returns on investment in mutual funds?

Systematic Withdrawal Plans allow an investor to withdraw funds from the invest annually, semi-annually, quarterly, and even monthly. They do not grant interest to the investor. They are the opposite of a systematic investment plan (SIP).

4. Which type of mutual fund is considered ideal for beginners?

In most cases, new investors are seeking long-term growth of their wealth, hence equity mutual funds are considered to be the ideal option. Alternatively, if a new investor is seeking tax saving investment option, then ELSS tax saver mutual fund might be the better investment option.   

5. How much can I invest in a mutual fund?

There is no upper cap on how much one can invest in mutual funds. Investors can choose to invest either via the lump sum investment route or the SIP (systematic investment plan) route. However, cash mutual fund investments are limited to Rs. 50,000 per investor, per mutual fund per financial year.


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