Are you new to mutual fund investing? Large cap mutual funds are then just the product for you. Let’s see what this type of fund is.
“Mutual funds are subject to market risks. Please read all scheme related documents carefully.” All mutual fund ads carry this disclaimer. Equity Mutual funds invest in listed stocks. The returns are linked to the market. Thus, mutual fund returns are not guaranteed.
Different types of mutual funds have different investment philosophies. Based on that, levels of risk vary. Let us understand the features to consider before investing in large cap funds.
Equity mutual funds invest in stocks of companies. All these stocks are listed and ranked according to market capitalisation (or market cap). There are three market caps, and they are large-cap, mid-cap, and small-cap.
Large cap funds are those which invest only in specific types of companies; i.e. companies defined in terms of full market capitalisation by SEBI. Such companies are known as blue-chip companies. Thus, these funds are also called blue-chip funds.
This is what you should know about typical large-cap companies:
- These companies are well-established in their field.
- They have healthy corporate governance practices.
- Such companies are financially stable.
- They have a good track record.
- They are known to give investors steady returns over time.
Companies like Reliance Industries, Bharti Airtel, Tata Steel, and ITC belong to this list.
SEBI has defined stocks that are included in large cap mutual funds’ portfolios. These funds invest in the top 100 listed stocks in terms of full market capitalisation. They need to have a minimum of 80% of the total asset composition in large-cap stocks.
We have seen that these types of funds invest in large companies. The companies have a proven track record. The associated risks, therefore, are relatively less compared to mid-cap or small-cap mutual funds. So, these funds are less volatile. Many first-time investors tend to have a lower risk appetite. They want to invest in equity markets without direct exposure to market-associated risks. Large cap funds are suitable for such investors.
Investments that carry more risk have the potential to give higher returns. Like any other, these funds are also vulnerable to market upturns and downturns. However, since the underlying stocks are financially secure, they tend to give slow and steady returns.
Past performance of these funds has shown that when markets were in a bear phase, these companies had continued to hold up. The stocks of these funds have also proven to be less sensitive to market corrections.
However, less risk may mean low returns. These funds may not deliver extraordinarily high returns during a bull market. Instead, they provide steady gains over time.
If you plan to put your money in these funds, you can expect modest growth in the medium to long term.
It helps to check historical returns over 1-year, 3-year and 5-year periods when investing in large-cap funds. What you also need to know is, past returns are not indicative of future performance. However, historical data gives you an idea of how the fund has performed over different market cycles.
Historical average returns over a 3-year timeframe have been in the range of 6%-9%. Average returns over five years have been between 8%-11%.
Over time, these funds can potentially give returns that beat inflation. But, you need to have realistic expectations. If held longer, you can expect sustainable profits as high as 20%.
These funds are ideal if you have a long-term investment horizon of 7-10 years. Over such a period, they may deliver returns of 10%-12%. Market conditions aren’t constant. You may see low or even negative returns during slumps; however, these will still react less sensitively to market volatilities. Your portfolio will make up for losses in the years when markets are doing well.
Large-cap stocks are ideal for making long-term personal financial goals. Whether it’s your child’s education or retirement, anything is achievable if it’s realistic.
It is essential to choose the SIP route for any mutual fund investments. There are several reasons why a SIP works better for large-cap schemes. First, you get the benefit of rupee cost averaging. Second, your risk is spread over time protecting your capital from being eroded.
Are you a cautious investor? Do you want to create wealth over a long period? Do you want to benefit from market returns? Then, large cap funds are for you.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.