Investing in equity mutual funds is a challenging task. Choosing a scheme with the right combination of choice of stocks, quality fund manager, and good performance can be a difficult process. While selecting an equity portfolio, the market capitalization or size of the company is an important parameter. After all, the market capitalization determines the risks and benefits of investing in the company. Equity mutual fund schemes are also categorized based on market capitalization – large-cap mutual funds, mid-cap mutual funds, small-cap mutual funds, multi-cap mutual funds, etc. It is important to understand these terms before you start investing. Here, we will explore Large Cap Mutual Funds and talk about some must-know features of these schemes.
What is Large Cap Mutual Fund
Large Cap Mutual Funds are equity funds that invest a bigger proportion of their total assets in companies with a large market capitalization. These companies are highly reputed and have an excellent track record of generating wealth for their investors over a long period. Large Cap Funds are hence known to generate regular dividends and steady compounding of wealth. Also, these schemes carry a lower risk as compared to the small-cap or mid-cap schemes and are known to generate steadier returns. They are a good option for investors with a relatively lower risk appetite and a long-term investment horizon. According to SEBI, large-cap companies fall in the top 100 of the list of companies according to market capitalization. Hence, investing in these companies is considered to be less risky and steady.
Invest in Large Cap Equity Funds
By now you know that large-cap funds invest in big organizations. These schemes try to offer regular dividends and capital appreciation in the long-term. If you are a risk-averse investor but want to benefit from equity investments, then large-cap mutual funds are the best option available to you. Since these schemes invest in financially strong large-cap companies, they can withstand a slowdown in the markets. However, the returns are lower compared to mid-cap or small-cap funds.
In the long-term (around five to seven years), large-cap funds tend to offer good capital appreciation. However, before you start investing, ensure that you consider your investment objectives and risk tolerance apart from the long-term investment horizon.
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Important Features of Large Cap Funds
Before you invest in large-cap funds, here are some things that you must consider:
Risk and Return of Large Cap Funds
All equity mutual funds are affected by market conditions. When the benchmark of the scheme fluctuates, the Net Asset Value (NAV) moves up or down too. However, unlike small-cap and mid-cap schemes, the NAV of a large-cap fund does not fluctuate a lot. Hence, investing in large-cap schemes offers stability to your investment portfolio. Having said this, the returns from these schemes is usually lower than the mid-cap or small-cap funds. Remember, you should invest in large-cap funds if you desire stable returns at a lower risk exposure.
Know the Expense Ratio of the scheme
Expense ratio is the fee charged by fund houses for managing your investment. It is the percentage of the total assets of the fund which are used for administrative and other fund management reasons. The Securities and Exchange Board of India (SEBI) has mandated that fund houses cannot charge an expense ratio of more than 2.50%. However, since most large-cap funds generate lower returns in comparison with mid-cap or small-cap schemes, you should look for a scheme with a lower expense ratio to help you maximize your returns.
Not for Short-Term Investors
When the market slumps, large-cap funds also experience underperformance of their portfolios. However, since the money is invested in financially strong companies, this underperformance averages itself out over a period time. The general understanding is that if you stay invested for more than seven years, then you can expect returns of around 10-12%. Hence, large-cap mutual funds are usually recommended to investors with a long-term investment horizon.
Consider your financial goals
Large-cap mutual funds carry a reasonable amount of risk and offer stable returns. Hence, many investors turn to these schemes when they are planning their investment for retirement. Also, investors who want to gain exposure to the equity markets without taking too many risks, prefer investing in large-cap mutual funds. It is important to consider your financial goals before investing.
What about tax?
Being equity funds, large-cap mutual funds are subject to capital gains tax and dividend distribution tax.
Dividend Distribution Tax (DDT)
When a fund house pays dividends, it needs to deduct DDT of 10% at the source before making the payment.
Capital Gains Tax
On redeeming the units of a large-cap fund, you earn capital gains – which are taxable. The rate of tax depends on the holding period – the period for which you were invested in the fund.
- The capital gains earned by you for a holding period of up to one year = Short Term Capital Gain (STCG) which is taxed at 15%.
- The capital gains earned by you for a holding period of more than one year = Long Term Capital Gain (LTCG). LTCG up to Rs. 1 lakh is not taxable. Any LTCG above this amount is taxed at the rate of 10% without indexation benefits.