Large-cap funds are those funds that mainly invest in the stocks of large-capitalization companies. The topmost companies as per their capital size are also called blue-chip companies, owing to which large-cap equity funds are also known as blue-chip funds. Large-cap funds are known to give stable returns in the long run and are marked as safe investments among all equity funds.
Investment Portfolio of Large Cap Funds
As per SEBI mandate, equity funds that allocate around 80% of their corpus to large-cap company stocks qualify to be large-cap funds. Large-cap or blue-chip stocks generally have a capital structure of more than Rs. 20,000 in India. SEBI lists the top 100 companies with the biggest capitalization as blue-chip companies. These companies owing to their large capital are likely to pay off debt on time, withstand the market turmoil and have a good debt-to-equity ratio. They are big companies that generate income from various channels, such that there is not a total burnout due to the failure of one or more sources of revenue.
Due to a proven record of large-cap funds regarding good management, timely distribution of dividends, and good balance sheet, they earn a name for themselves. Such stocks are frequently traded and hence are highly liquid, considering there are fewer chances that they will crash down in the stock market. Large-cap funds invest for most parts in such blue-chip stocks that have a brand value and high liquidity. Therefore, it is good for investors who seek exposure to equity markets at lower risks.
At the same time, large-cap stocks already have a high value due to their goodwill and performance in the market. They have reached a high point and hence, grow gradually and can deliver steady returns in the long-term. Similarly, a blue-chip fund will earn returns on investments if the investor can hold the units for at least 5 years, the longer the better.
Some of the key features of large-cap funds are:
- Large-cap funds or blue-chip funds are basically equity funds that invest majorly in equities than any other asset class. Among various kinds of equities, they focus on stocks of blue-chip companies
- Blue-chip stocks, owing to their reputation, quality, and reliability, are easily traded, even in bad times. The frequent sale and purchase of stocks leads to easy cash flow and thus makes the blue-chip funds highly liquid
- Due to the continuous trading of the stocks of blue-chip companies, rapid changes are not very common in the stock values of large-cap firms. Therefore, there is not an instant growth in fund returns but they also do not hit the plummet easily. Thereby, blue-chip funds deliver stable returns
- Because of stability and liquidity, bluechip funds are a more secure investment in equity funds than mid-cap or small-cap funds. Although large-cap funds are also subject to market risks, they do not take a sudden plunge. Returns can go negative when stocks go topsy-turvy but that is a rare case. Even if it happens for a while, blue-chip stocks are quick to bounce back and they hardly go out of sight in the market due to their continuous trading. This makes large-cap funds withstand the perils of market downturns
Some of the features of large-cap funds already indicate the benefits of a large-cap fund. However, from an investor point of view, the advantages of large-cap fund investments are:
- With large-cap funds, an investor can own a share in multiple large capital companies with one fund. This way, one can earn returns through profits of various stocks
- Investments in various stocks also dilute the risk because even if one or a few stocks fail, the others would most likely perform
- Blue-chips funds offer stable returns over long-term as blue-chip companies are leaders in their respective industries and can survive the bear market
- Although blue-chip funds concentrate on large-cap stocks, the fund managers try to keep sectoral diversification
- These funds are highly liquid, show consistent growth, and survive the market upheavals which makes them a preferred investment option for investors
Should you Invest in Large Cap Funds?
Should you invest in large-cap funds? The answer to this question lies with the investors themselves as they should invest in funds that align with their goals. Check out the benefits that large-cap funds offer and if they are in sync with your investment objectives and risk tolerance. You should invest in large-cap funds for the following reasons:
- If you are an investor that has a long-term investment horizon as large-cap funds deliver returns in a span of a minimum of 5-7 years
- Low-risk investors who want to bet on equities but also play safe can invest in blue-chip funds. They are the safest among equity funds
- Those investors who wish to accumulate a wealth corpus in the long-term should invest in large-cap equity funds
- Do remember that all funds come with some applicable charges that include managerial fees and compensation, so check the Expense Ratio before investing in any fund
- Know the taxation of short-term and long-term capital gains of equity funds and dividend plans as well. Short-Term Capital Gains (STCG) are taxed at 15% when units are sold off within a year. Long-Term Capital Gains (LTCG) are taxed at 10% if they exceed Rs. 1 Lakh. DDT (Dividend Distribution Tax) is deducted by the fund houses before distributing the dividends to the investors as they have to pay this tax. DDT for equity funds is 11.65% currently
Wrapping it up:
Large-cap funds are essentially equity funds that invest in stocks of large-sized companies as per the capital structure. Such company stocks are pioneers in their sectors, with good operational management, steady cash flows, and strong balance sheets. These factors make them profitable businesses with large capitalization and a good reputation in the market. Such stocks deliver good returns when times are favorable but also survive the negative market weather. Thus, large-cap funds are safest among equity funds offering stable returns and high liquidity for investors with long-term investment horizons.