Mutual Funds are everywhere these days. They have become a preferred choice amongst all classes of investors. As per a report by AMFI (Association of Mutual Funds in India), till December 2018 equity mutual funds have received investment worth more than Rs. 8 lakh crores. There are various ways in which mutual funds can be categorized. This includes geography they invest in, sectoral preference, investment style or the size of the companies they invest in. Mutual Funds get classified into large-cap, mid-cap and small-cap basis the company’s size or market value.
Read on to know more about the large cap funds and benefits of investing in them.
What are Large-Cap Mutual Funds
Large-Cap mutual funds invest a significant portion of their total corpus in companies which have a large market capitalization. Also known as large-cap companies, these are renowned and well-established market players. Such companies have been around for a long period of time. They have a strong track record and are usually the market leaders. They are also known as blue-chip companies. This name comes from the world of poker where the blue chip gets encashed for the highest denomination.
Some of the key features of these companies are:
- Stable and professional management
- Strong corporate governance
- Consistent performance across market cycles
- Less volatile as compared to mid-cap or small-cap companies
According to a Crisil Research, the daily average rolling returns since inception for the AMFI large-cap funds was 20% in the last ten years (as compared to 17% by small and mid-cap funds)
What is Market Capitalization?
Market capitalization is nothing but the market value of the company as traded on a stock market. This value is derived by multiplying the current share price with the total number of the outstanding shares.
Impact of SEBI Guidelines on Large-Cap Mutual Funds
SEBI’s recent re-categorization has changed the criterion to classify a company as one of the following – small-cap, mid-cap or large-cap.
Earlier, large-cap funds used to invest in the top 100-200 companies (in terms of market capitalization). However, with the revised SEBI guidelines (released in October 2017) things have changed. The regulatory board has redefined the list of fund categories. It has mandated all Asset Management Companies to re-categorize their schemes in accordance with the new guidelines. Now a large-cap fund needs to necessarily invest a minimum of 80% of the corpus in the largest 100 listed companies. Remaining funds can be invested in other stocks.
There is no standard guideline or definition of the market capitalization of a large-cap fund. Usually, it is taken as more than Rs. 20,000 crores. Though this number is subject to variation.
Why should one invest in Large-Cap Mutual Funds?
There are various benefits associated with large cap mutual funds. Some of them are:
The biggest advantage that a large-cap fund brings to an investment portfolio is stability. Large-cap companies are well-established and enjoy a strong reputation in the market. Usually such companies are market leaders in their sectors or industry. There are less chances that volatility in the economy or industry will render them insolvent or force them to discontinue their operations. Their ability to absorb market fluctuations is very high. They can withstand even a bear market.
- Lower risk
Large-cap mutual funds are apt for investors who have a low risk profile. As the companies are stable, well-renowned and have a strong track record, investors feel more secure with large-cap funds.
- Steady dividend payouts
These companies are known to offer steady dividend to their investors. This factor makes it a preferred investment choice for investors on the lookout for regular income through a relatively conservative investment approach. These dividends add up to impressive overall returns for the investors when analyzed from the perspective of performance evaluation in the long run. The regular dividend payouts also compensate for the fact that large-cap companies usually have stagnant stock price and offer little-to-no appreciation in capital.
Large-cap companies usually have been in business for a very long time. This makes it easier for potential investors, creditors or fund houses to obtain financial details and other relevant information. This details aid in their research and evaluation purposes. This data when looked along with the history and the current business activities of the company, can aid in the accurate valuation.
- Strong Corporate Governance
Large-cap companies are industry or market veterans. Owing to their size, market standing and organizational complexity, these companies usually implement robust corporate governance models. Investors who invest their funds in such companies through large-cap funds, witness a gradual increase in their wealth in the long term.
Who should invest in large-cap mutual funds?
Large-cap mutual funds are ideal for conservative investors. People who do not have a high risk tolerance but still want to get exposure to the equity segment should go for these schemes. Additionally, investors who have a long-term investment horizon can also consider these. This is because large-cap mutual funds have potential to create wealth in the long-run. Mid-cap or small-cap funds may be able to surpass large-cap funds in a bullish environment. But they fall much more during a bear phase.
That being said, even the risk takers should consider putting some of their money in these funds to balance the portfolio. Diversification will help them to reduce their overall risk, especially in volatile market conditions.
All investors should invest in large-cap mutual funds. The proportion of these mutual funds in the overall portfolio should depend on a host of factors such as the investor’s risk profile, financial goals and the investment horizon. Even the most aggressive investors should park some of their funds in large-cap schemes in order to balance their portfolio.