What are Large Cap Funds? - Meaning, features & benefits

If you are looking to generate wealth over the long term by earning inflation-beating returns, then consider investing in Equity Mutual Funds. One of the ways Equity Mutual Funds can be classified is based on the market capitalisation of the companies the scheme invests in, such as large-cap, mid-cap, small-cap or multi-cap. Since large-cap equity funds tend to be less volatile compared to other equity funds, these type of funds are suitable for investors with moderately high risk appetite with a long-term perspective. Let us understand what is a large-cap fund in detail.

What are large cap mutual funds?

Large-cap Mutual Funds invest at least 80% of their portfolio in equity and equity related instruments of large-cap companies. Large-cap companies constitute the top 100 companies in terms of market capitalisation. They are well-established companies known for their stability and are less affected by market fluctuations compared to smaller companies.

Since these companies have been around for a long time, chances are that they have gone through multiple business cycles, a strong reputation and a proven track record of generating significant wealth for their shareholders. This makes Large-cap Mutual Funds a popular choice if you are looking for steady growth and moderately high risk.

You can invest in large-cap funds either in a lump sum or through Systematic Investment Plans (SIPs). Lump sum investment allows you to invest a certain amount at a point in time whereas, in the case of SIP, you invest a pre-determined amount each month to gradually build wealth.

Features of large cap funds

• Risk and return: Large-cap funds are relatively less risky as compared to their counterparts, i.e., small cap and mid-cap funds. Therefore, often returns from Large-cap Mutual Fund are comparatively modest, but stable.
• Not for short-term investors: Large-cap funds do not fluctuate like small or mid-cap funds. However, it is advisable you stay invested in a Large-cap Mutual Fund for a longer period to earn optimal returns.
• Steady compounding: As these funds invest in companies with proven track records, higher market shares, strong management pedigrees and steady cashflows, Large-cap Funds can be a long-term steady compounder in your investment portfolio.

Why invest in large cap mutual funds?

• Stability of investment: Large-cap fund investments are relatively stable as compared to small and mid-cap funds as they are invested in stocks of established companies. These companies are not disturbed by fluctuations in the market.
• Multi-sector diversification: In Large-cap Mutual Funds, money is invested in large companies across different sectors, like pharmaceutical, FMCG, petroleum, green energy, banking, IT, etc. This offers multi-sector diversification, thereby reducing your overall investment risk.
• Resist economic downturn: Since large companies have stable cashflows and adequate resources to survive in adverse economic situations, large-cap funds have the potential to withstand an economic downturn. This creates stability for your portfolio.
• Long-term stable growth: Large-cap funds are suitable to accumulate wealth in the long term. When the power of compounding kicks in, your wealth grows steadily over the long duration of the invested fund.

How does a Large-cap Mutual Fund work?

In a Large-cap Mutual Fund, 80% of the portfolio is invested in large companies. The fund manager pools money from investors, and invests it in a diversified portfolio of large-cap stocks. Professional fund managers make all the decisions relating to the administration and management of the fund.

Ways to invest in a Large-cap Mutual Fund

• Direct investment: You can directly invest in Large-cap Mutual Funds through an asset management company (AMC).
• Online platforms: Various online broking platforms allow you to invest in large cap mutual funds.
• Financial advisors and distributors : You can invest through financial advisors or mutual fund distributors / agents. However, investing through them will attract commission charges.

Taxation of Large-cap Mutual Funds

When you sell your Large-cap Mutual Fund investments, the profit is taxed as capital gains. If the units are sold within a year of investing, they shall attract short term capital gains (STCG) of 15%, whereas, if the units are sold after a year, the gains shall be taxed as long term capital gains (LTCG) at 10% for gains exceeding ₹1 lakh.

Things to consider before investing in Large-cap Funds

• Investment goals: Consider your investment goals before investing. If you wish to invest for a long term with stable growth, then Large-cap Mutual Funds are the ideal choice.
• Liquidity: You should check the liquidity aspect before investing in large-cap funds. If you anticipate the need for funds within a short span of time, then you should consider other investment schemes.
• Type of fund: You need to check the type of fund you are investing in, whether it is a growth fund or a dividend fund. Dividend funds allow you to earn passive income regularly in the form of dividends. However, in the case of growth funds, the returns will be reinvested into the scheme, thus unlocking compounding benefits.

Also Read: How to invest in Mutual Funds in 7 easy ways

Conclusion

Investing in large-cap funds can help you grow your wealth significantly over a period of time. However, selecting the right fund is important to reap good returns. Consider your investment goals and choose the right funds wisely.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.