What are Large Cap Funds?
Large cap funds are those mutual funds, which look for capital appreciation by investing primarily in stocks of large blue chip companies* that have more potential of earning growth and higher profit.
*Blue chip companies – they are large well established organizations which are superior in financial shape, industry leaders and have low debt to equity ratios. Examples are the constituents of Sensex, Nifty such as, Infosys, Bharti Airtel, Reliance Industries, HDFC, Hindustan Unilever Limited, etc.
Each Asset Management Company has their own investment objective which defines the large cap company based on market capitalization. Two such examples are given below:
Mutual Fund Scheme -
Principal Large Cap Fund
Investment Objective -
The scheme is to provide capital appreciation and/or dividend distribution by predominantly investing in companies having a large market capitalization. For the purpose of this fund, large cap companies are defined as those having market capitalization greater than Rs. 750 crores as on the date of investment (or any such amount as may be specified by India Index Services Ltd.[IISL]) and in being the upper limit of market capitalization as a criteria for inclusion of a company in CNX Midcap 200 Index.
Mutual Fund Scheme -
Canara Robeco Large Cap Fund
Investment Objective -
The fund is to provide capital appreciation by predominantly investing in companies having a large market capitalization. For the purpose of this Fund, Large Cap Companies are defined as those which are ranked from 1 to 150 on the basis of market capitalization at the time of investment. The ranking is reviewed periodically.
Risk-Return of investing in Large Cap funds
Investing in large caps scheme is comparatively low risk/low returns because such companies being established business houses, their business data is widely researched and information about them is easily available to all.
- These funds are less volatile than mid cap and small cap funds.
- They are ideal investments for risk-averse/conservative investors wanting to enter the stock market without owning too much risk.
- In the long-term, large cap funds out perform returns from mid-cap and small-cap funds.
The ideal time to invest in large cap funds:
To invest in equity mutual funds there is no such thing as an ideal time. Best way to enter is through a Systematic Investment Plan (SIP). One of the advantages of investing through SIP for the long-term is it adjusts the “returns” and “cost of purchase” during volatile times.
InvestmentYogi helps us understand parameters an investor needs to consider before investing in any large cap fund. These pointers would help one make an informed decision and not be fooled by a mutual fund agent selling non-performing schemes as superior large cap funds to invest:
1) ‘Investment Objective’ of the fund -
The most important document an investor needs to understand is the KIM (Key Information Memorandum) of mutual fund scheme. Investors are expected to clearly know the ‘investment objective’ of the MF scheme. A KIM will also provide other relevant information such as total funds under management into equity and debt scheme, portfolio composition, expenses, etc
2) Tracking performance of the fund -
Investor needs to analyze the historical returns of the scheme with benchmark index such as Sensex or Nifty. If the fund’s return are out performing consistently in last 3 to 5 years then investor may consider it as a good sign to invest. Past performance is not a guarantee of future returns. However, a MF scheme performing consistently well even during volatile times (such as the financial crisis of 2008) can be considered as a good buy.
3) Analyzing risk of fund -
An investor needs to first identify his/her risk appetite before investing in a mutual fund. For this reason, one must clearly understand the investment objective of the MF (mutual fund) scheme and whether it is in line with one’s risk appetite.
Investors with a long investment horizon and/or low-moderate risk appetite may consider large-cap mutual funds.
An investor can analyze the risk of a MF scheme through various statistical measures. Such information can be easily viewed from MF research reports and/or financial websites.
4) Diversification is an ideal policy -
Another key parameter an investor needs to emphasize on is diversification of their investment amount. It is wise to know the portfolio composition of the MF schemes debt and equity proportion, sector-wise proportion, and investment holding in each company. Also, a fund needs to invest across 20 to 30 companies from different sectors. This is considered as ideal portfolio for any scheme. For example, if a fund has investments in only 6-12 stocks than it is considered a risky investment and an investor should avoid investing in such funds. A portfolio of a scheme is said to be over-diversified when there are stocks from more than 75 companies. Such over-diversified schemes should also be avoided because this makes it difficult for fund manager and his team to track individual stocks.
5) Background of Fund Manager -
It’s important to know who is handling the fund of a particular scheme. Fund managers are professionals having the requisite qualifications and experience to manage your money. But, it’s necessary to have background check of schemes they have handled earlier and what were the returns/ performance of those schemes before investing.
6) Cost – There are no entry loads to invest in mutual funds. But, investors have to pay fund management fee and administrative charges on an annual basis. These two charges together cannot exceed 2.5 % of the fund’s assets, as specified by SEBI. As discussed earlier investors need to go through KIM/offer document before investing to know any hidden charges specified, such as early redemption charges, etc. There will be an exit load specified in the KIM/offer document which also needs to be considered before investing. The charges are almost similar across the similar MF schemes.
Comparison of Large Cap Mutual Fund vs. Other Investments:
|Product||Return||Safety||Liquidity||Tax Benefits Under Section 80C|
|Bank FDs (Fixed Deposits)||Low||High||Low||No*|
|Company Fixed Deposits||Moderate||Low-Moderate||Low||No|
|PPF (Public Provident Fund)||Moderate||High||Low||Yes|
|NSC (National Savings Certificate)||Low-Moderate||High||Low||Yes|
|MIPs (Monthly Income Plans) of mutual funds||Moderate||Moderate-High||High||No|
|Unit-linked Life Insurance Plans (ULIPs)||Moderate||High||Low||Yes|
|Large Cap Mutual Funds||Moderate||Moderate||High||Yes**|
*Except 5-year tax saving deposits; **ELSS (Equity-Linked Savings Schemes).
Current Top Performing “Large Cap Mutual Funds”:
|Scheme Name||1 Year*||3 Year*||5 Year*||Since Inception*||Minimum Investment (Rs)|
|HDFC Top 200||27.91||17.32||27.73||25.57||5,000|
|UTI Dividend Yield||36.64||18.93||23.35||22.96||5,000|
|DSP BlackRock Top 100 Equity||20.85||13.65||27.10||35.37||5,000|
|Reliance RSF – Equity||27.73||20.02||23.18||22.79||500|
Note: Returns over 1 year are annualized (CAGR); the above list is not exhaustive.
Written for InvestmentYogi by Hiral Thanawala
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