Understanding Large Cap Funds and Making a Smart Investment Choice

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.  

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 High liquidity of large cap fund investments means that the investment can be easily withdrawn in an emergency.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.  

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.

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.