Q. I am a 35 year old tractor-dealership owner. I come from an old school minded family that believes in investing in traditional financial instruments like gold, silver, fixed deposits, insurance schemes and real estate. Coming from a small town, I have no exposure to the stock market and its workings and am wary of investing in stocks right now. A friend suggested me to invest in a large-cap mutual fund. I am a beginner, can you please elaborate on what is a large-cap mutual fund and why a small investor like me should invest in it.
Abhishek Jain, Bhatta Parsol, Uttar Pradesh
Equity-oriented large-cap mutual funds are generally considered to be the most effective financial instruments for building wealth over the long term. SEBI (Securities and Exchange Board of India), the regulator of mutual funds and stock market, has classified mutual funds into three main categories based on their market capitalization ie (1) Large Cap, (2) Mid Cap and (3) Small Cap. Large cap companies are the top 100 listed companies on the Stock Exchange (NSE/BSE). Midcap companies are ranked from 101st to 250th in terms of market capitalization. Small cap companies are all companies below the 250th in terms of market capitalization.
What is market capitalization?
Market capitalization is the total value of all the shares of a listed company which is often expressed by the formula: Market capitalization = Current value of the company’s shares * Total number of outstanding shares of the company.
What are large-cap funds?
Large-cap mutual funds are a category of equity mutual funds that invest at least 80% of their corpus in the top 100 listed companies by market capitalization. These 100 companies are generally leaders in their fields of business. Historically, large-cap companies have produced stable returns and have a greater ability to withstand economic uncertainty. This is considered suitable for conservative investors who want to build wealth without exposing their capital to large amounts of volatility.
Advantages of large-cap funds
As a result of solid financial positions and viable business plans, the growth, revenue generation and revenue of the top 100 companies are consistent and stable. Therefore, the probability of large-cap companies facing bankruptcy due to economic conditions is quite low. Compared to mid-cap and small-cap companies, they are generally less affected by market swings and thus provide portfolio stability. Additionally, these companies distribute dividends, which contribute to the steady accumulation of investors’ wealth.
Large-cap mutual funds invest in blue-chip companies with a reputation for good performance, sound financials and reliable earnings, so their share values are considered less volatile. As a result, companies are in a better position to provide investors with capital growth over time.
Since large-cap companies are well-established and have been operating for years, it is fairly easy to collect information about their operations, financial statements, and profitability. This transparency makes it easier for investors to examine the data and decide whether a stock is worth investing in.
Another advantage of large-cap stocks is their high liquidity in the stock market. Therefore, it is easy to open an entire portfolio in a bear market without affecting prices or incurring huge losses. This can be crucial during periods of volatility. Therefore, fund managers of large-cap funds can acquire and sell large-cap stocks whenever necessary to maximize profits.
Large-cap stocks have the ability to withstand the ups and downs of numerous market cycles. They can not only prosper during a bull market but also withstand market volatility during a bear market. It is a relatively safe investment vehicle that can withstand economic downturns and recover quickly without jeopardizing future prospects.
Large-cap funds invest mostly in India’s top 100 companies in terms of market capitalization. These companies form the backbone of the Indian economy. However, being an equity fund, there is a certain degree of risk associated with investing in large-cap mutual funds. When compared to mid-cap and small-cap mutual funds, they are considered less risky in the long run.
Therefore, large-cap equity funds are suitable for long-term asset appreciation. As an investor, you can benefit from the consistent returns of these funds while exposing your portfolio to a relatively low level of risk.
You can invest in these funds for planning expenses like your children’s college education, their marriage and your retirement. If you are a novice investor looking for a reasonably safe exposure to the equity markets, this strategy is perfect for you. However, you should be aware of the fact that all investments in mutual funds are subject to market risk.
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Note: This story is for informational purpose. Please speak to a financial advisor for a detailed solution to your queries.
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First Published: 03 Dec 2022, 10:21 AM IST