What are Large Cap Equity Mutual Funds? – Advisor Forbes INDIA
It is well known that equity mutual funds offer an investor advantages that are difficult to obtain through other investment vehicles. When selecting a stock portfolio, market capitalization or company size is a crucial factor as it ultimately determines the risks and rewards of investing in the company.
There are three main categories of market capitalization-based equity mutual funds that one can invest in – large cap, mid cap, and small cap.
The Securities and Exchange Board of India (SEBI) has established separate guidelines and demarcation lines between each of the three categories, and its reclassification describes all the changes that have been made to the different investment funds.
Here’s how large-cap mutual funds work and the factors to consider before investing in them.
What are large cap funds?
Equity funds that invest a higher percentage of their total assets in organizations with large market capitalizations are called large-cap mutual funds. These companies have a solid reputation and a proven track record of bringing wealth to investors over a long period of time. Therefore, large cap funds are known to produce consistent dividends and stable wealth accumulation.
In addition, these plans have a lower risk profile than small- or mid-cap funds, and they are considered to produce more consistent returns. According to SEBI, large-cap companies are in the list of the top 100 companies by market capitalization.
Who should invest in large cap funds?
Large-cap funds are often preferred by investors who make prudent use of their equity assets and seek stability in their investments rather than highly volatile or fluctuating earnings.
Investors should keep in mind that even the strongest large-cap funds may at times fall short of the expected market return relative to mid- or small-cap companies. However, large-cap mutual funds can withstand any decline or reduction in market capitalization, due to longer-term investment horizons.
Investments in large cap funds are suitable for people looking to diversify their portfolios through their fund managers. If an investment in one sector does not meet investors’ expectations, there are other sectors to invest in and mitigate the negative impact. Compared to small and medium-sized companies, large-cap funds generate lower returns because they are less risky and less volatile. It is a fantastic investment plan for new investors.
Factors to Consider Before Investing in Large Cap Funds
Research Risk and Return
Market conditions impact all stock mutual funds. The net asset value (NAV) fluctuates with the plan’s benchmark index. However, unlike mid- and small-cap funds, the net asset value of large-cap funds does not fluctuate significantly. Therefore, investing in large cap plans provides stability to one’s investment portfolio. That said, these plans often generate lower returns than mid- or small-cap funds. Thus, one should invest in large cap funds if they want stable returns with less risk exposure.
Know the expense ratio
The expense ratio is the cost that fund companies charge for managing its investment. It represents the portion of the fund’s total assets that is used for administrative and other fund management functions.
Fund houses are prohibited from charging expense ratios above 2.50%, according to the SEBI mandate. One should look for a plan with a lower expense ratio so that it helps maximize returns.
Consider the investment period
Large-cap funds also experience underperformance of their portfolios during market declines. However, this underperformance evens out over time as the money is invested in financially sound organizations. Therefore, large-cap mutual funds are often offered to investors with long-term investment horizons.
Understand your financial goals
Large-cap mutual funds offer consistent returns while posing a manageable level of risk. As a result, many investors use these plans while planning their investments for retirement.
Taxation of large cap funds
Large-cap mutual funds are taxed the same as other equity funds. Dividends from large-cap investments were tax-exempt until the 2020 budget because fund companies had to pay the dividend distribution tax (DDT) before paying the necessary dividends to investors.
By restoring the traditional nature of the taxation of dividends in the hands of the investor, Budget 2020 amended this law. Dividends from investment funds are included in total income and taxed according to the investor’s income tax bracket.
The retention period affects the amount of capital gains generated by equity funds that are taxed. By selling fund units within one year of purchase, short-term capital gains may be generated. Regardless of the type of income tax, these gains are taxed at a flat rate of 15%.
Long-term capital gains occur when equity fund investments are sold after being held for a year or more. These profits up to INR 1 lakh are tax free. But profits that exceed this threshold are subject to a tax rate of 10%, leaving no indexation profit.
Benefits of Investing in Large Cap Funds
Diversification into multiple industries
Typically, large-cap funds invest in a diversified portfolio of high-quality, long-term stocks, and fund managers continuously monitor fund performance.
Large-cap stocks are known to withstand fluctuating market conditions, while providing the benefit of adequate liquidity should the need arise.
Better capital growth
Since large-cap funds invest in companies known for their outstanding business and financial performance, these funds generally offer long-term appreciation.
In short, large-cap funds are ideal for investors, especially novices, who seek long-term capital appreciation in stocks that have a better appetite for risk and are resilient to volatile market conditions. A long-term investment in large-cap equity mutual funds – which will last at least five to seven years – is the preferred investment period.