Understanding what are Large-Cap Funds

Have you seen the term ‘large-cap funds’ added to the names of mutual funds? Do you know what these are and what ‘large’ indicates? If not, you have come to the right place. Large-cap funds are investment vehicles that focus on established, well-known companies. They offer exposure to large-cap stocks, which are shares of companies with a high market capitalisation. To decide whether or not to invest in them, make sure you know the answer to “What are large-cap funds?” in depth. Let's get into their details.

Unveiling large-cap mutual funds

In the context of investments, market capitalisation is used as a key metric to differentiate between companies. Market capitalisation refers to a publicly-traded company's equity's total market value. According to the Securities and Exchange Board of India (SEBI), large-cap companies are ranked from 1st to 100th based on their total market capitalisation. Large-cap companies stand tall and are known for their stability and resilience, allowing them to weather economic downturns more successfully than their smaller counterparts.

As the name suggests, large-cap funds are mutual funds that primarily invest a notable portion of their assets in companies with large market capitalisations. Large-cap funds are open-ended equity funds that invest a minimum of 80% of the fund's total assets in equity and equity-related instruments of large-cap companies.

Things to consider before investing in large-cap funds

Before venturing into the world of large-cap funds, it is crucial to consider the following key points:

• Investment horizon:

  Large-cap funds are generally suited for a mid-to-long-term investment timeframe. If you are planning to invest for mid-to-long-term goals, you may benefit from investing in these funds. However, they may not be suitable for short-term goals.

• Risk appetite:

  Large-cap funds invest in well-established companies that tend to be less volatile than small or mid-cap companies. But they still carry inherent risks associated with all equity funds. Hence, evaluate your risk tolerance level and then invest in a fund that aligns with it.

• Expense ratio: 

  All mutual fund schemes charge some fees, such as the expense ratio, to cover management costs. Higher expenses can eat into your returns, so comparing fees may be advised.

• Tax liabilities:

   Large-cap funds are subjected to long- and short-term capital gains tax. If you hold an investment for up to a year, your short-term capital gains will be levied with a 15% tax rate. If you hold your investment for more than a year, your long-term capital gains will be charged with a 10% tax rate on gains exceeding Rs 1 lakh in a financial year.

Who can invest in large-cap funds?

Large-cap funds are typically well-suited for investors with a longer investment horizon who prefer a more balanced approach to risk and return.  

Large-cap funds are suitable if you wish to gain exposure to the stability offered by well-established leaders in their respective industries. These funds provide some level of security to you during uncertain times, as they are relatively less volatile. This makes large-cap funds less risky compared to mid-cap and small-cap funds. Hence, they may be suitable if you wish to curtail risk within your equity portfolio. Having said that, large-cap funds, like all equity funds, do contain risk. It is also important to note that large-cap funds may underperform compared to mid-and small-cap funds as large cap companies have limited scope for further growth.

How to invest in large-cap funds?

You can invest in large-cap funds through a Systematic Investment Plan (SIP) or a lump sum investment.

• SIP is an investment method that allows you to regularly invest a fixed amount of money at predetermined intervals, such as weekly, monthly, or quarterly. You can decide the amount you wish to invest and select a frequency based on your financial situation.

• Lump sum investments allow you to invest a sum of money at once. This can be done once or multiple types as you see fit. However, there is no fixed routine you need to follow, and you can choose to invest your money as and when you like.

You can reach out to a fund house or a registered broker to start investing in large-cap funds using both these methods. All you need to do is provide the necessary documentation and open an account.

To sum it up

Large-cap funds can offer exposure to stable and well-known companies. Before you invest in them, it is important to research well and select a fund that aligns with your investment objectives. Also, remember to consider your financial goals and risk appetite.

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