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What are Large Cap Mutual Funds?
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Investing in the stock market can be a complex process, mostly for those new to the world of finance. You may have come across a term called ‘Large-cap Mutual Funds’. But what does this mean and why should you consider investing in them? This blog aims to explore Large-cap Mutual Funds, explaining their features, benefits and how they work.
Understanding Large-cap Mutual Funds
Large-cap Mutual Funds are equity funds that invest in companies with large market capitalisations. These are highly-reputed companies known for their stable performance and consistent wealth generation over long periods.
The term 'large-cap' is derived from 'large market capitalisation' with 'cap' short for capitalisation. In India, according to the Securities and Exchange Board of India (SEBI), large-cap companies are ranked in the top 100 in terms of market capitalisation.
Why invest in Large-cap Mutual Funds?
Large-cap Mutual Funds are known for investing in financially stable companies with large market capitalisations, offering lower risks and steady returns. These funds not only provide a diversified investment option but also offer tax efficiency and are particularly suited for long-term growth. Let's get to know why large-cap Mutual Funds can be a smart addition to your investment strategy.
Lower risks
Large-cap Mutual Funds invest in financially strong companies, making them less likely to be affected by market volatilities compared to mid-cap or small-cap funds.
Steady returns
These funds are known for providing stable but lower returns compared to more volatile equity funds.
Diversification
Large-cap Mutual Funds offer diversification within your investment portfolio, which can be vital in managing risks.
Tax efficiency
Being equity funds, large-cap Mutual Funds are subject to capital gains tax, which is usually more favourable compared to the taxation on income from Fixed Deposits or Savings Accounts.
Long-term growth
These funds are suited for long-term growth, making them an ideal choice for investors looking to build wealth over time.
Key features of Large-cap Mutual Funds
Large-cap Mutual Funds are known for offering stability and reliability, primarily investing in blue-chip stocks known for their market flexibility. Offering benefits like regular dividends, suitability for long-term financial goals and high liquidity, large-cap Mutual Funds are a wise choice for investors seeking a balanced approach to wealth creation. Let's explore the key features of large-cap Mutual Funds:
Stability
Large-cap Mutual Funds are less likely to be affected by market fluctuations, offering more stability compared to other equity funds.
Dividends
Many large-cap Mutual Funds provide regular dividends, thus making it ideal for those seeking a steady income stream.
Suitable for long-term goals
These funds are suitable for long-term financial goals like retirement planning, etc.
Investment in blue-chip stocks
Large-cap funds invest in blue-chip stocks, which are stocks of well-established companies with a good track record.
High liquidity
The stocks of large-cap companies are frequently traded, providing high liquidity to the investors.
How do Large-cap Mutual Funds work?
Large-cap Mutual Funds pool money from various investors to purchase a diversified portfolio of large-cap (blue-chip) stocks. These funds are managed by professional fund managers who allocate assets to optimise returns while balancing the risks. The performance of these funds is often benchmarked against a market index like the S&P BSE 100.
How to invest in Large-cap Mutual Funds?
Whether you prefer direct investment, an online platform, professional guidance or a systematic approach, there are multiple options to explore. Here's a brief overview of the methods you can use to start investing in Large-cap Mutual Funds:
Direct investment
Investors can directly invest in these funds through asset management companies.
Online platforms
Various online platforms provide easy access to Mutual Fund investments, including large-cap funds.
Financial advisors
Investors can also seek advice from financial advisors for tailored investment strategies.
Systematic Investment Plans (SIPs)
SIPs allow investors to invest a fixed amount regularly, making it a disciplined approach to investing.
Who should invest?
Large-cap Mutual Funds are best suited for the following:
Long-term investors
Those with an investment horizon of 5-7 years or more.
Risk-averse investors
Individuals who prefer stability and lower risk in their equity investments.
Retirement planning
Investors looking for reliable growth for their retirement corpus.
Risks and returns
While Large-cap Mutual Funds are safer than mid-cap and small-cap funds, they are not entirely risk-free. Market conditions can still affect the fund's performance but to a lesser extent. It's essential to understand these risks and align them with your risk tolerance.
Tax implications
Understanding the tax implications is an important aspect of investing in Large-cap Mutual Funds, as it directly affects your returns. In India, such investments are subject to specific tax rules, including Short-Term Capital Gains Tax, Long-Term Capital Gains Tax and Dividend Distribution Tax. Let's understand how they impact your investments in Large-cap Mutual Funds, enhancing your financial planning and decision-making process.
Short-Term Capital Gains Tax (STCG)
For units sold within a year, gains are taxed at the rate of 15%.
Long-Term Capital Gains Tax (LTCG)
For units held for more than a year, gains are taxed at the rate of 10% on the returns that are over Rs 1 lakh without indexation benefits.
Dividend Distribution Tax (DDT)
DDT is deducted by fund houses before distributing dividends to investors.
Large-cap Mutual Funds offer a mix of stability, potential for growth and lower risk, making them an attractive investment option for many. They are suitable for investors with a long-term perspective and a conservative risk appetite. However, like any investment, it's important to do thorough research and consider your financial goals and risk tolerance before investing.
By understanding the basics of Large-cap Mutual Funds, you can make informed decisions and find a valuable addition to your investment portfolio.
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