Although investing in mutual funds is fairly common nowadays, first-time investors still tend to need a little help. They tend to have questions about mutual funds—the types, the pros and cons, and so on. To make things a little simpler and less intimidating, we bring you an explainer on one of the types—large cap mutual funds.
Understanding large cap mutual funds
Large cap mutual funds invest in shares of companies with large market caps—that is, market caps of over ₹20,000 crores. Organizations with large market caps are essentially established players. They are known for their market dominance. Such companies, it is believed, tend to generate steady returns over a long period.
Large cap funds are a type of equity fund. Therefore, their fortunes tend to be affected by market fluctuations a lot more.
Advantages of large cap funds
If you want to invest in some large cap funds, you should have the advantage of investing in them at your fingertips. To get you there, here’s a quick overview of the pros.
The most important advantage of any large cap fund is a low risk. As these funds have a lot of capital, they invest in several large securities and companies. So, the risk factor automatically decreases due to diversification.
Also, since large caps are well-established players, the risk is still lower. Additionally, they are likely to yield higher returns due to the same reason.
Large-cap fund investments are also easily redeemable. They can be redeemed anytime after the purchase, and they are also partially withdrawable.
Who should invest in large cap funds?
If you want to invest in equity but don’t want a lot of risks, these funds are a good option. Also, large caps have been known to better withstand bear markets, so they make for a safer investment portfolio. That said, all equity involves some amount of risk, so factor in your long-term goals and risk appetite is always a good idea.
Is it good to invest in large cap funds?
An investment is only as good as its suitability for an investor. While there are fewer risk factors in this type of equity-based mutual fund investment, you need to do your own research and assess its suitability in your case. Assessing your investment objectives and long-term goals, along with your risk appetite, is the best way to answer this question.
Factors to consider before investing in large cap funds
Before investing in large-cap funds, it is imperative to understand and consider a few factors. Below are some of the factors that you absolutely need to look into before investing.
No matter what, if you invest in mutual funds, you need to assess the risks first. Different funds will have different risks. That is why you need to study yours well.
You also need to check the expense ratio of the fund. This will help ensure that the fund is complying with the SEBI rule and that you aren’t being overcharged. A lower investment ratio means more savings. Read more about expense ratios here.
If you want to invest your money in a large cap fund, you need to factor in your investment horizon. Doing so will help you commit to the investment period.
Tax on capital gains
Tax is one of the most critical factors in mutual fund investment. It can translate into losses if the tax is too high. For instance, with capital gains from long-term investments, up to ₹1 lakh gain is free from taxation. Learning about such details will help you make better investment decisions.
Large caps can be a useful investment option if you want high gains but low risks. However, you need to do your research thoroughly before investing in any equity-based fund. Once you understand all of the finer points in relation to your large cap mutual fund, you will also feel more confident about your investment choice. And the chances that you pull out prematurely will also reduce.
1. Which is better—mid cap or large cap mutual funds?
There is no objective answer here. Just remember that these equity funds differ in their features and values. For example, the risk and return will be lower if you invest in the large one. For mid caps, both are going to be moderate. Factoring all of this in should help you decide which works better for you.
2. What is considered a large mutual fund?
If the market cap of a company is high—higher than ₹20,000 crore—the company is a large cap. A large cap mutual fund is one that primarily invests in these companies.