Large-Cap Mutual Funds' Investments – Meaning, Scope, and Benefits
When you think of investments – you either think of short-term or long-term investments. There are traditional and contemporary ways of investing your money, but the end goal remains to earn higher returns with the least amount of risk.
When it comes to investing in stocks and shares – there are three main categories you can invest in Equity funds, Debt funds, and Hybrid funds (a mix of equity and debt funds)
Equity funds are more volatile but generate higher returns. Under equity funds, you can invest in large-cap, mid-cap, and small-cap funds. This is a comprehensive guide to what large-cap funds are all about!
What are Large-Cap Funds?
Large-cap mutual funds are investments made in large, well-established companies with sound corporate governance, strong reputation, goodwill, and credibility. SEBI has established precise boundaries and conditions between all three categories and their reclassification.
Large-cap funds are investments in well-established companies that can tolerate market capitalization. These companies are highly regarded and have a strong track record of generating sound returns for investors over the long term with the help of compounding interest rates. These investments offer lower risk and more stable returns than small-cap or mid-cap programs.
It is a good option for investors with a relatively low-risk appetite and long investment horizons. According to SEBI, large-cap companies rank among the top 100 companies by market capitalization. Therefore, investments in these companies are considered stable.
Who Invests in Large-Cap Mutual Funds?
Large-cap funds are for investors with a low appetite for risks and who expect investment stability and sure-shot returns irrespective of the market's volatility or fluctuating returns. However, even the best large-cap funds may not deliver the expected returns.
Large-cap funds have the potential to withstand market capitalization. These funds may also consider rebalancing investments to make up most of their investment portfolios to add consistency to their investment profile. Investing in large-cap funds is suitable for large companies in the market sector and those who want to diversify their portfolio.
It is the perfect investment program for new investors who have just started to learn about the market.
Taxation of Large-Cap funds
Until Budget 2020, dividends were tax-free as the companies paid a dividend distribution tax (DDT) before paying the required dividends to the investors. The 2020 budget changed this law, returning it to its classic character of taxing dividends in the hands of investors.
Dividends paid by mutual funds are added to gross income and taxed according to income tax brackets.
- Selling shares in the fund can provide short-term capital gains within a one-year holding period which are taxed at 15%.
- After a one-year holding period, the equity fund shares can be sold for long-term capital gains at a 10% tax rate without any indexation benefit. LTCGs up to INR 1 lakhs per financial year are tax-free.
The Risks of Large-Cap Investments
Large-cap funds are subject to the following risks:
- Liquidity risk when the fund manager sells the security without making a profit because there are no buyers.
- Market Risk when markets underperform due to external and internal influences.
- Concentration risk when all stocks are purchased by a single company, which has incurred huge losses.
- Interest rate risk is the security price that falls because of the company's creditworthiness and market demand.
- Credit Risk means the company fails to pay out the actual principal or interest amount to the investor, and it is when the security reaches maturity.
Factors to Consider Before Investing in Large-Cap Mutual Funds
Always Examine Investment Risk
There are a variety of market-specific risks, but these are fairly moderate. Net asset value (NAV) fluctuations are small compared to smaller funds.
Consider the Investment Period
Large-capitalization funds work best for medium- to long-term investments ranging from 3-5 years. This helps to evaluate the potential returns of the offerings.
Compare the Cost Rate, Exit Loads, or the Expense Ratio
Large-cap fund investments with a high expense ratio or high exit loads mean lower returns. So, if the costs are high, then you must look to invest in some other stocks.
Consider the Past Performance
Analyzing historical performance is important when deciding to invest in large-cap funds. Choose companies that consistently pay out dividends and principal investment amounts.
Based on Your Investment Goals
Always trust a professional fund manager to help you invest in large-cap funds. Your investment should be based on your investment portfolio and your investment goals.
Do Your Research on Your Fund Managers Before Investing
Trust only the expert and experienced fund managers with complete know-how in the mutual fund market. The fund managers should be able to take the vital decision of moving the capital from one fund to another in case the market shows good signs. This can help you earn higher returns
How to Invest in Large-Cap Funds?
You can invest in large-cap funds by making a lump sum investment for several years (long-term preferably), or you could start a systematic investment plan (also called SIP). This encourages you to save every month, and the amount is automatically deducted from your accounts and invested into large-cap funds.
All you need to do while investing in large-cap funds are:
Step 1 – Fill out the application form and select the fund you want to invest it
Step 2 - Select whether you want to go for the one-time payment or the SIP options
Step 3 – You must perform e-KYC using your proof of identity, proof of address, proof of age, and other financial information. (Pan card and Aadhar card)
Step 4 – You must choose your chosen investment period, pick the desired payment method, complete the transaction, and start investing.
Advantages of Investing in Large-Cap Funds
Large-cap funds allow you to invest in historically well-performing companies. The advantages of investing in large funds are:
- Investment stability - These companies have solid business plans and are financially stable, resulting in constant growth and earnings. Therefore, large companies rarely go bankrupt due to market conditions.
- Informed investment decisions are an advantage as you have your research in the performance, profitability, investment experience, financial statements, and operations of the companies that you are investing in.
- Improved capital growth as these companies you invest in are known for their high performance.
- A large-cap segment is a great option for diversifying beyond market capitalization when investing in blue-chip companies.
- High liquidity in underprivileged portfolios without incurring losses can be significant for volatile stocks.
- Large-cap stocks can thrive during market turmoil without hurting your business prospects.
Top Large-Cap Mutual Funds
Here is a list of the best large-cap mutual funds that have delivered the best returns over the past three years.
The Best Large-Cap Mutual Funds To Invest In 2022
- Edelweiss Large Cap Fund
- ICICI Prudential Bluechip Fund
- Invesco India Largecap Fund
- L&T India Large Cap Fund
- Mahindra Manulife Large Cap Pragati Yojana
- Mirae Asset Large Cap Fund
- Nippon India Large Cap Fund
- SBI Bluechip Fund
Conclusion
Large-cap funds are recommended for investors, especially beginners, looking for stable returns with low risk. The success of large mutual funds and the potential to deliver high returns depends on the investment's size and duration and the fund managers' expertise and experience. When investing in large-cap funds, make sure you invest for the long term, ranging between 5-7 years.
Frequently Asked Questions
Who manages large-capitalization funds?
Large-cap funds are managed by experts who are experienced and professional fund managers.
How much do I need to invest in a large-cap fund?
You can start with a SIP for as low as INR 500 or invest a large amount as a lump sum investment.
Are large-cap funds risky?
Large-cap funds come with lower risk and better performance than other equity funds. Since you invest in prominent companies with a good historical record of making regular returns, the risk factor gets quite low.
Are large-cap funds tax-free?
No, returns from large-cap funds fall within the 10% tax rate range (LTCG), and if the investment period is less than a year, 15% of tax will be levied (STCG). Returns up to INR 1 lakhs are tax-free in a given financial year.
Is it a good idea to invest in large-cap funds?
Large-cap fund investments are made in credible companies that can bear market fluctuations and have a large market capitalization.
So, these are safe-to-invest-in companies, and the risk factor is low, especially if you are a new investor or have a low-risk appetite. You may earn a return of around 10-12% if you keep investing for 7 years or more.