What Is A Large-Cap Mutual Fund, How It Works And What Are Risks Involved?

Many Indian investors opt for mutual funds for investing in the stock market. While there are various investment instruments available in the market, mutual funds are considered a safe bet, especially for newcomers, as they invest in multiple equities that offset the market risks and ensure fair returns.

Mutual funds are available in various shapes and sizes. For instance, the funds could be based on sector-specific or market-weighted assets. A mutual fund portfolio could also be a mix of large-cap, mid-cap, and small-cap companies to balance risk and growth, or a single class of large-cap, and mid-cap.

The Indian market has seen phenomenal growth in large-cap and mid-cap segments over the past decade – one of the reasons why more and more investors are willing to take a plunge in stocks.

Here we focus on large-cap mutual funds in India, how they work, and what are the risks involved.

What Are Large-Cap Mutual Funds?

According to the Securities and Exchange Board of India’s (Sebi) recategorisation norms, large-cap mutual funds are supposed to invest at least 80 per cent of their assets under management (AUM) in equity shares of large-cap companies. 

Large-caps are the top 100 companies in the country in terms of market capitalisation. Every quarter, industry body Association of Mutual Funds in India (Amfi) publishes a list of the top 100 companies by market cap. Fund houses usually follow this list when making investments in large-cap stocks.

Large-cap mutual funds are equity funds that allocate a major part of their assets in large-cap companies with excellent track-record, brand recognition, and relative financial stability even during market turmoil vis-a-vis mid-caps and small-cap companies. Some examples of Indian large-cap companies include Hindustan Unilever Ltd., Infosys Ltd., Reliance Industries Ltd., Tata Consultancy Services Ltd., etc.

Thus, large-cap companies have a better chance to withstand a bear market, and as such, the large-cap mutual funds could provide better stability to investors’ portfolio, especially during market volatility.

The ICRA MFI data shows that India’s large-cap segment generated a compound annual growth rate (CAGR) of 11.4 per cent in the last 10 years and 11.6 per cent CAGR over the past five years.

Furthermore, between June 2019 and 2022, the Indian Large-Cap Index advanced at a 16% CAGR, according to the financial services firm Motilal Oswal.

Who Should Invest In Large-Cap Mutual Funds?

Risk-averse investors looking for a medium to long-term investment horizon (five year plus) could opt for large-cap mutual funds. It is best suited for those looking for stable returns in the long term. Besides, they could also adjust their portfolio investments overtime depending on the market condition.

Thus, large-cap mutual funds are ideal for newcomers looking to invest in the financial market. Besides stable returns, they could benefit from the large-caps’ ability to withstand market pressures.

What Are The Risks In Large-Cap Mutual Funds?

Those looking for quick and high returns could leave out the large-cap mutual funds. But if you are looking for steady, long-term growth, large-cap mutual funds could be an ideal choice.

Market Risks: Large-cap mutual funds also come with  market risks, but relatively lower than the mid-caps and small-caps. For instance, the fluctuations in Net Asset Value (NAV) are significantly lower than the small-cap or mid-cap funds.

Returns: Large-cap mutual funds may not give you higher returns compared to mid-cap or small-cap funds. So, keep return expectations realistic. It is because most large-cap companies already hold a significant market share; hence, growth could be in small increments. But returns would be less volatile. Also, their stability during a downturn would counterbalance slow growth during a market rally.

Expense Ratio: All mutual funds, including large-caps come with a cost for fund management. Hence, the fund’s low expense ratio bodes well for investors. The expense ratio is the fee charged by mutual funds based on the asset under management (AUM). Expense ratio could have a bearing on the fund’s operating efficiency. Sebi has set the upper limit of the expense ratio at 2.50% of the total AUM.

Investment Horizon: Large-cap mutual funds work best for those looking for medium to long-term investments (at least five years plus) for a possible fair return on offer. Investors may refer to OLM-50- Outlook Money’s hand-picked recommended list of schemes.

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