Large-cap Equity Funds — Concepts, Pros, Cons and More!

Indian equity markets have remained buoyant over the past one year with the benchmark index almost doubling from the bottom it made in March 2020. A lot of interest has been there amongst the new investors to have exposure to the equity as well. However, not everyone has got the ability to understand the cycles equity markets go through. While someone may have the ability they may not have time to focus on such kinds of investment. Mutual funds are good for such investors and also for the newcomers, especially when it comes to equity exposure. Equity mutual funds can also be divided into large-cap, mid-cap and small-cap funds. There are further types like multi-cap, focused funds value or contra funds, and so on.

What are Large-cap Funds?

Equity funds are mainly categorised based on the market capitalisation basis and segregated in three different types viz large, mid and small.

Market Capitalisation = Market Price * Number of Shares Outstanding.

When it comes to the classification of funds, Securities and Exchange Board of India (SEBI) has defined the criteria for large-cap, mid-cap and small-cap companies to be invested by mutual funds.

Large-cap companies are the first 100 companies in terms of full market capitalisation. Mid-cap companies are from 101–250 in terms of full market capitalisation. And from 250 onwards are the small-cap companies.

Large-cap mutual funds are a category of equity mutual funds that predominantly invest in large-cap companies. As per SEBI guidelines, large-cap mutual funds invest 80 per cent of their corpus in large-cap companies.

If we go by fundamental factors, it is stated that, as the business performs well even the scrip performs well on the bourses. And as the price moves upwards even the market cap rises. The kind of companies that appear in the list of top 100 have grown significantly over the years backed by the consistent performance on the financial front. Further, most of such companies have been able to assess the economic peaks and troughs as those have longer historical performance. The historical presence is not only because of consistent financial performance but also because of innovation and strong management bandwidth. With so many positive factors, top 100 companies are considered one of the best opportunities to invest in.

Large-cap funds are considered to be a very good investment for those who are new to the markets. These companies are usually less volatile and most of the time they have got a good downside cushion and then they are significantly liquid providing a broader opportunity to investors. However, one must understand that, in case of large-cap mutual funds, the time horizon should be kept longer. Let us understand a few advantages and disadvantages of large-cap funds.

1. Better capital appreciation Large-cap funds only invest in large companies, such funds are in a position to offer better capital appreciation over the years. The ability of such companies to perform consistently, strong management bandwidth and long historical background usually results in higher premiums enjoyed by the investors as well.
2. The list of large-cap companies includes leading sectors like Telecom, Oil and Gas, Pharmaceuticals, Automobiles, Banking and Financial Services and so on. With the leaders from the different sectors available for investment, large-cap mutual funds tend to outperform in the long run. It may happen that during the bullish phase in equity markets the small-cap and mid-cap funds would outperform the large-cap funds. However, when one wants to accomplish long term financial goals, large-cap funds are a better placed option.
3. Comparatively stabilised portfolio Although large-cap companies are actively traded in the equity market, they are not as volatile as some of the mid-cap and small-cap ventures. Even if the return generated by large-cap companies is moderate, the growth is always consistent and is mostly in a positive direction. Therefore, investing in large-cap mutual funds will add stability to your overall investment portfolio.The mid-cap and small-cap companies may outperform in the bullish phase, but there are few restrictions in terms of having larger exposure. Sometimes the equity of mid and small companies is very low and buying by funds makes the stock move upwards quickly, making the average buying cost eventually higher. Thus, on a comparative basis, the large-cap mutual funds are less volatile.
4. Diversification One of the advantages of investing in large-cap funds is that one gets a diversified portfolio with companies from multiple different sectors. One doesn’t have to take the trouble of monitoring individual sectors and tracking their performance.
5. Results in long-term wealth creation Large-cap companies are well-established organisations that have been around for a long time and that will continue to operate well for the foreseeable future. If one invests in a large-cap stock, there is a steady growth over the years. For this reason, large-cap funds are always considered a favourable option for investors who are focused on long-term wealth creation and long-term financial goals without much volatility.
6. Ability to withstand a bear market Since large-cap companies have been around, they have the ability to withstand multiple market cycles. The managements of the large-cap companies have been through different economic peaks and troughs. This experience helps them withstand the market dynamics. Such funds either remain stable in declining markets or in some cases bounce back quickly.
7. A Few of Disadvantages First and foremost factor is with just 100 stocks available for investment the investment universe is lower, compared to the other funds like small-cap and mid-cap funds. Further, one must choose the large-cap fund with care as there is not much diversification possible by buying large-cap funds. Reason being there would be overlapping happening even if someone tries to diversify by buying more of large cap funds.

Should You Buy Large-cap Equity Funds?

The large-cap mutual funds are good for new investors beginning their investment journey. It is also a very good investment for someone who is willing to start investing early and is focused on building long-term wealth. Those who want to start small and understand how equity mutual funds work should try on large-cap funds. Those who have a horizon of more than 5–7 years can take exposure to large cap funds.