Who should invest in large cap mutual funds?

Before finding an answer to ‘should I invest in large cap funds’ or not, it is essential to get a deeper conceptual understanding of the product. Large cap mutual funds are those funds that invest 65% or more of their assets in stocks of different large cap companies only. The rest of the assets can be invested in cash or debt. This percentage has been mandated by the Securities and Exchange Board of India (Sebi) which is the Indian stock market regulator.

How do we know which stocks are large cap stocks?

Large cap stocks, by definition, means companies which have relatively larger market capitalisation that other listed companies in the market. Market capitalisation is the total market value of all the outstanding shares of the company that are traded in the market. According to Sebi’s definition, the list of large cap stocks consists of stocks of those companies which rank 1-100 in terms of market cap. Mid cap stocks rank between 101-250 and small cap stocks rank 251 onwards.

Here is a list of large cap stocks from different industries for your reference. This list is not a recommendation, please exercise the necessary due diligence before selecting a stock to invest in.

  • State bank of India
  • HDFC Twins (HDFC Bank and HDFC)
  • Reliance Industries
  • Sun Pharma
  • Infosys
  • Hindustan Unilever
  • Tata Motors
  • Indian Oil

What are large cap mutual funds and how do they work?

Therefore, large cap mutual funds are equity oriented mutual funds that invest in stocks/shares of large cap companies. Large cap funds have a fund manager each. These fund managers are the ones who decide which large cap stocks will go into the mutual fund’s portfolio and which will be removed. Fund managers have the knowledge and expertise to understand the world of stocks. They pick the large cap stocks and we pay them ‘expense ratio’, a charge investors pay for the fund manager’s and the asset management company’s (AMC) services. There are many large cap funds in the market. Some funds like the JM Large Cap Fund Direct Growth were launched in 1994.

Nature of large cap companies:

The following points will help you to understand the nature and composition of large cap companies that make up some of the best large cap mutual funds:

Scale: Now that we know what makes stocks large cap, it is important to know the nature of these stocks. Large cap companies are those companies that are large in scale and size, their businesses are bigger in scale. Naturally, these will be companies that have been in the market for a long period of time, they have withstood many macroeconomic and global disruptions and come out stronger. These companies generally have a stronger and more secure growth trajectory in future.

Risk: Hence, given the nature of the category, large cap stocks have lower risk. Their growth path is much stronger in future and they have experience in tackling all kinds of adversities. This does not mean that during an adverse economic situation, large cap companies will still be churning profits and returns on your stock investment. Large cap stocks being low risk means that their ability of being able to withstand such downturns is better. The risk level of large cap stocks then translate into the risk level of large cap funds. For example: Kotak Bluechip Fund Direct Growth has a ‘moderately high’ risk.

Returns: Risk and returns are correlated in the same direction. If the returns are high the risk will also be high. In the case of large cap stocks, the risk is moderate in comparison to its peer equity categories: small- and mid-cap stocks. The returns are also moderate. Equity as a category gives high returns but within equity, large cap stocks have more moderate returns.

Wealth creation: Large cap stocks have proven their mettle when it comes to long term wealth creation. These stocks are the ‘park it and leave it’ kind of stocks. They will multiply your wealth over a longer period of time. Some of the best large cap funds have given a decent performance over a longer period of time.

Should I invest in large cap funds?

The following parameters will help you to understand if a large cap fund suits you or not.

Risk should be high enough to be an equity investor: The main criteria to be an eligible large cap investor is to make sure your investor profile is okay with equity as a category. Equities are more volatile than debt funds and traditional banking products. Hence the risk is higher in equity funds in general.

Conservative equity investors: Say you are okay with equities but you still want to be slightly lower on the risk barometer. if you have crossed the first stage, the second criteria you need to look at is, if you are an aggressive equity investor or a conservative one. If you think you want to take lesser risks but enough to be in the equity category, you should go for large cap stocks.

If you are an aggressive investor, you can keep your exposure more towards small- and mid-cap funds and keep your exposure lesser towards large cap. Never completely avoid a category. Diversification helps you to even out the shortcomings and risks of the categories.

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