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Understanding the basics of Large-cap Funds.
Investing in mutual funds comes with its own set of benefits and risk factors. However, if you choose a suitable scheme and fund for you, they are a great investment vehicle. The Security and Exchange Board of India (SEBI) has categorised mutual funds into five broad types, with equity funds being one of the categories. SEBI further classifies equity funds into 11 sub-types; one of them is the large-cap fund. This article explains what is a large cap fund, along with its key features and investment criteria.
According to the SEBI, companies with a significantly high market capitalisation, i.e., around INR 20,000 crores, are listed as large-cap companies. When mutual fund managers invest funds in these companies, those funds are termed large-cap funds.
These companies have an exemplary track record and have shown to generate wealth for their investors over a long period. Due to their well-established nature of generating returns, they are low-risk and have a long-term investment horizon.
Large-cap mutual funds follow a structured investment process to generate long-term equity returns. Here is how large cap funds in India work in sequence:
Large cap mutual funds offer a balance of stability, growth, and liquidity, making them a preferred choice for long-term equity investors. Key features of large cap mutual funds include:
Large-cap equity funds are typically influenced by market conditions but in a conservative way. The Net Asset Value (NAV) fluctuates at a low level, thus providing stability to your investment portfolio. This attribute makes them a considerably low-risk investment when compared to mid or small-cap funds.
Large-cap funds generate consistent, average returns, even during volatile market conditions. In comparison, the returns caused by mid-cap and small-cap funds are more volatile – they can be higher during a bullish market and fall significantly when the market falls into a bearish slump.
Large-cap funds are actively managed by fund managers who charge a minimal rate for their work, also known as the Expense Ratio. SEBI has mandated that this expense ratio must not exceed 2.50%. Asset Management Companies survive the growing competition of attracting investors by charging lower expense rates. Therefore, you should look out for lower expense ratio schemes to maximise your returns and eventually compensate for the expense charges.
A large-cap fund is a type of equity fund, and the rate of taxation depends on the holding period. Short-term capital gains (redeemed within a holding period of one year) attract 15% tax. Long term capital gains (redeemed after a holding period of one year) up to INR 1,00,000 are tax-exempted. Any gains above INR 1 Lakh will attract a 10% tax.
Large cap mutual funds are taxed as equity mutual funds under Indian tax laws. The applicable taxation rules are as follows:
As mentioned above, large-cap funds are meant to provide steady and consistent returns with low risk. These funds are commonly used as the core equity component in long-term portfolios due to their relatively lower volatility compared to mid-and-small-cap funds. Rather than choosing funds based on rankings, investors benefit from assessing whether a large-cap fund fits their asset allocation strategy. Risk tolerance, and investment horizon,
Therefore, these investments are ideal for conservative to medium-risk investors who can stay invested for a minimum of five to seven years. Investors willing to lock away their investments for this horizon are likely to benefit from investing in large-cap mutual funds.
Large-cap equity funds are funds of companies that have stood the test of time on the stock exchanges during stable and volatile markets. These equity funds invest in low-risk large-cap companies and offer steady returns when held for an extended period. If you wish to maintain a diversified investment portfolio with funds offering stable returns, you should consider investing in large-cap funds.
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*Disclaimer: This article is for information only. We recommend you get in touch with your income tax advisor or CA for expert advice.
Yes. Large-cap funds are suitable for long-term investment as they invest in financially stable, market-leading companies with established business models. They typically offer better stability and consistency over time compared to mid- and small-cap funds, making them suitable for long-term wealth creation.
Large-cap funds invest in the top 100 companies by market capitalisation and focus on stability and lower volatility. Mid-cap funds invest in medium-sized companies with higher growth potential but higher risk and price fluctuations. As a result, large-cap funds are generally better suited for conservative equity investors, while mid-cap funds suit investors with higher risk tolerance.
Large-cap mutual funds are suitable for investors seeking long-term capital appreciation with relatively lower risk than mid- or small-cap funds. They are commonly used by first-time equity investors and those looking to build a stable core equity portfolio.
