3 Reasons Why You Should Invest in Large Cap Fund
John recently started his investment journey keeping the safety angle in mind and chose bank fixed deposits. Moving ahead, he is keen on progressing on to mutual funds, which has many benefits, including transparency and potential for growth, but cautiously. When he inquired with investor friends, he knew of a mutual fund category called large-cap mutual funds. Though the returns his friends earned looked promising, what made him sceptical was that the fund invested in equity may fluctuate since they are dependent on the volatility of the stock market. Finally, John decided to invest a part of his investment portfolio in large-cap mutual funds. What made him arrive at this decision? What is it that made him confident about the large-cap funds? Let's understand step-by-step.
What are large-cap funds?
According to the Securities and Exchange Board of India (SEBI), ''mutual fund categorisation rules, large-cap funds are the mutual fund schemes that invest at least 80% of the scheme's assets in the stocks of large-cap companies' equity equity-related instruments. Large-cap companies are those stocks that rank in the top 100 companies in terms of their market capitalisation. Large-Cap Funds are expected to provide regular dividends over a long time. As a result, the steady compounding of your wealth is expected to be ensured to a considerable extent. In addition, these funds have a lower risk profile than small-cap or mid-cap funds due to the size of the large-cap companies, and their investment horizon is long.
Additional read: ICICI Direct- Types of mutual funds
It is relatively safe as the value of a large-cap fund scheme's net Asset Value (NAV) is prone to fluctuations as the scheme invests a substantial percentage of its pooled money in the stocks of the large-cap companies listed on the stock market. However, the volatility in the value of NAV is expected to be lesser than small- and mid-cap mutual funds. In addition, investment in large-cap mutual funds is subject to applicable capital gains taxes. So then, what makes it a beneficial choice of investment?
Additional Read: What is NAV How it is Calculated in Mutual Fund
Why should you opt for large-cap funds?
Large-cap companies are considered to be financially strong. As a result, typically, large-cap companies do not face insolvency unless there are some substantial issues in the company's management. As a result, the large-cap mutual funds provide stability to your investment along with steady growth. Furthermore, large corporations usually periodically pay out a sizable dividend, which aids in the steady accumulation of wealth in your portfolio.
Additionally, the large-cap mutual funds thrive in bull markets and can also withstand market turbulence. As a result, it's a relatively safer investment that can withstand a downturn and quickly recover without jeopardising business prospects.
A better appreciation of capital:
Blue-chip corporations are the focus of large-cap mutual fund schemes. These companies' strong performance and consistent earnings promise a good return. Large-cap companies stock prices are relatively stable. As a result, they provide investors with long-term capital appreciation.
During periods of market volatility, liquidity is critical, which is abundant in large-cap funds. Investors can easily liquidate their entire portfolio during a downturn in the market if needed. To maximise returns, large-cap fund managers can buy and sell large-cap stocks conveniently. In addition, market fluctuations have a minor impact on the large-cap stock prices and thus the large-cap fund NAV, limiting any significant losses.
If you aim for getting the best out of equity investments, you should invest in large-cap mutual funds. Large-cap funds are a good choice for investors who want consistent returns that do not fluctuate too much over time. Although the funds are not immune to market downturns, they fare better than other funds. In addition, large-cap mutual funds can help you diversify your portfolio. However, to get the most out of these funds, you'll need to look at your short-term financial needs as well as your long-term objectives. So, look into the expense ratio and the fund's past performance and analyse and invest in appropriate large-cap funds.
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