As an investor, it is often confusing to decide your vehicle of investment, especially when you hear varying opinions on television or from your peers. That’s why it is important to understand the benefits and risks of each segment, so that it is easier to make an informed decision. Amongst the several investments you might have come across, large-cap funds are considered a great choice. Let’s find out why:
What are large-cap funds?
As the name suggests, these funds invest in companies with a large market capitalisation. Market experts advise these funds for long-term wealth creation; what’s more, large-cap funds are also stable when it comes to delivering returns.
These funds invest 80% of their corpus in the top 100 companies listed in the stock market. Large-cap funds are great for an investor who is not too prone to taking risks; on the contrary, small-cap and mid-cap funds are prone to high risks. Due to the stability component, large-caps funds are often preferred by first-time investors, since they register consistent performance during different market cycles.
One thing that an investor must keep in mind is that these funds do not generate very high returns, even when the market is bullish, but large-cap funds are less vulnerable to volatility.
Advantages of large-cap funds
Great credibility: To begin with, these funds generally invest in large cap companies that make it to the list of top 100 in the stock market. These companies enjoy a great reputation and are helmed by an astute business leader. Further, their track record can be monitored, since they have been around for a while.
Strict governance practices: Another huge advantage of large-cap funds is that these companies follow stringent corporate governance practices. While investors may not receive skyrocketing returns (though they are good), these funds help towards wealth creation in the long run and pay dividends regularly.
Stable returns: There’s another reason to invest in these funds – they offer stable and low-risk returns. This makes it a great option for both first-time and seasoned investors, who want to get good returns but are risk-averse. In addition, these funds can withstand a bear market.
Things that an investor must keep in mind while investing in large-cap stocks
While large-cap funds are not as prone to risk like small and mid-cap funds, but you still need to weigh a few factors before you begin investing. Here are a few things an investor must keep in mind when he decides to go for large-cap funds:
- Investment objective: Make sure you check if your investment objectives align with that of the fund. At the same time, check the track record of the fund and how it has performed during different market cycles (both bearish and bullish). Go for funds that are consistent in their performance, irrespective of the market conditions.
- Fund manager’s experience: When it comes to large-cap funds, a fund manager plays a pivotal role in the fate of your returns. Those who have good experience and are adept in their field will be able to make the right decisions, so that you can reap high returns!
- Expense ratio: This is also an important factor and includes costs such as brokerage, fee charged by the mutual fund house etc. Some fund houses may charge a steep rate, but they also offer great returns. Keep these factors in mind and then decide!
- Check the exit load: This is a cost that an investor incurs directly. While this comes into the picture when you decide to sell your shares, but remember it does form a chunk of the NAV that you receive. If you have a lower exit load, then you get higher returns.
These funds are great for first-time investors, especially since 80% of the corpus is invested in large-cap companies. This makes it a relatively safe option! Besides, they are also more credible and have a strong financial reputation. While it’s a great option, the performance of this fund is also heavily dependent on the decision-making skills of your fund manager. If you have a great manager who’s skilled at what he does, then this is going to be a great choice of investment!