Demystifying Mutual fund categories
What are large cap Mutual Funds?
- Large-cap mutual fund invest in large-cap stocks
- Large-cap stocks are the top 100 companies in terms of market capitalisation
- These are relatively less risky than other categories of equity-oriented funds
- These funds are meant for new investors or those who have low risk capacity but still want an equity kicker
There are different categories of mutual funds available in the market but not all of them are suitable for everyone. In a series of articles, we will demystify the various categories of mutual funds for you. Here is what large-cap mutual funds are and who they are meant for.
Large Cap Mutual Funds Meaning Explained
According to the Securities and Exchange Board of India’s (Sebi) recategorization norms, large-cap mutual funds are supposed to invest at least 80 per cent of their assets under management (AUM) in equity shares of large-cap companies.
Large-caps are the top 100 companies in the country terms of market capitalisation. Every quarter, industry body Association of Mutual Funds in India (Amfi) publishes a list of the top 100 companies by market cap. Fund houses usually follow this list when making investments in large-cap stocks.
Market capitalisation is calculated by multiplying the current stock price of a company by its outstanding shares. For example, if Company A has a total of 450,000 shares outstanding and the price of each share is Rs 2,000, the market cap of the company will be Rs 90 crore.
Equities are volatile and so are large-cap stocks. However, they are considered to be less volatile than other stocks. That’s because, typically, large-cap stocks belong to established companies with enough assets and businesses to support themselves. These companies are considered fundamentally strong. The risk of the companies shutting down is nearly zero. In other words, they are the top of the heap in business, which is why they are also commonly known as bluechip companies or stocks.
The mutual funds that invest in these stocks are, therefore, less volatile than other equity-oriented funds.
Who Should Invest In These Funds?
These funds are meant for investors who are new to equity and those who have low risk capacity but want some equity kicker to their returns.
Hence, if you are an investor who cannot digest wild volatility even in the equity part of your portfolio, you may consider adding large-cap mutual funds to your portfolio.
While large-cap funds may give you relatively steady returns, it is important to keep realistic expectations as these are also in the equity space. For instance, these are usually stocks that form a major part of the index and we see the index fluctuating everyday as per market movements.
Also, sometimes, the returns from large-cap funds may be relatively lower compared to those from mid-cap or small-cap funds. But that’s because the risk is relatively less in large-caps. The risk of losing is higher in small-caps and mid-caps compared to large-caps. So align your return expectations accordingly.
Since large-caps are also essentially equity funds, it’s important to keep a longer horizon of five or more years. Also, never make the mistake of comparing the risk aspect to a debt investment.
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