Five important traits of large-cap funds

Five important traits of large-cap funds

Large-cap funds are often regarded as the crème-de-crème of mutual funds. They invest in the top 100 companies (in terms of market capitalization) which are known for their performance, stability, quality of management and corporate governance.

Here are the top five traits of large-cap funds which you should be aware of.

1. They help to supplement your current income

Large-cap Equity Mutual Funds invest in stocks of well-established companies. Most of these entities have already reached the “maturity” phase of the company life cycle. It is difficult for them to grow at a rapid pace when they are already lead their respective industries or market. These companies are cognizant of the fact that their stock price may not appreciate in value at the same rate as a growing company. Hence, they try to compensate the investors through regular dividend payouts. This pay-outs help to create an additional source of income for the investors.

2. They are your ally in a bearish market

Stability and safety are two important characteristics of large-cap stocks. These companies, due to their lineage, management quality and scale of operation are less likely to succumb to an economic or business circumstance and come to an end. Even in bearish markets, when the value of mid-cap and small-cap stocks plummet significantly, large-cap stocks are able to manage the downside more effectively.

Here is a comparison of the returns from equity fund investments across market capitalization segments for the last two years

3. All large-cap funds may not be worth your money

Do you feel that all large-cap stocks will generate good returns for you? The answer is a big No. Here is a snapshot of the maximum and minimum returns from equity fund investments in the large-cap category.

If you look at the equity fund returns of large-caps, you can see a lot of divergences. Hence, do not invest in a fund merely because it belongs to the large-cap category. You need to consider the following factors while choosing your fund.

• Factors such as fund’s age and size (AUM), past returns-absolute as well as relative to their peers and benchmark, expense ratio. Performance should be analyzed for at least 3-4 years and not just the last year.

• Fund manager’s qualification, market reputation and AUM/Performance of other funds under his management

• Level of diversification. Concentration in a few sectors increases the risk quotient of the fund and polarize the equity fund’s returns.

• Financial ratios such as the Sharpe Ratio, standard deviation, etc.

• Unnecessary churn in the fund

4. They too invest in mid and small cap stock

The SEBI requires large-cap equity mutual funds to invest at least 80% of their total assets in stocks of large-cap companies. The balance of 20% can be allocated across other market segments. In fact, investment in mid and small cap stocks enhances the fund’s potential for capital appreciation in the long run.

5. They are suitable for all types of investors

You would have mostly heard that large-cap equity mutual funds are for people who have a low-risk appetite or who are first-time investors. While this is true that these funds help such investors to get accustomed to the volatility associated with equity investing, they are lucrative options for other investors as well. For instance, aggressive investors can use large-cap stocks to balance and stabilize their portfolio. Hence, irrespective of the risk-profile, all investors should have some proportion of these stocks based on their investment tenure and financial goals.

Final Words

Size matters! At least for equity fund investments. Large-cap equity mutual funds are a great addition to an investor’s portfolio, especially when you have an investment horizon of minimum 5-7 years. However, it is important to remember that no market cap will perform well at all times, as markets are cyclical. Hence, always balance out your investments in multiple directions.