Q. I am a 35-year-old tractor-dealership owner. I come from a family with an old-school mindset that believes in investing in conventional financial instruments such as gold, silver, fixed deposits, insurance schemes, and real estate. As a person coming from a small town, I have no exposure to the stock market and its workings and I am quite wary of investing in stocks right now. A friend suggested that I invest in large-cap mutual funds. Since I am a novice, can you please elaborate on what a large-cap mutual fund is and should a small investor like me invest in it.
Abhishek Jain, Bhatta Parsaul, Uttar Pradesh
Equity-oriented large-cap mutual funds are generally perceived as the most effective financial instruments to build wealth in the long term. SEBI (Securities and Exchange Board of India), regulator of mutual funds and the stock market, has classified mutual funds into three major categories based on their market capitalization i.e (1) large cap, (2) mid cap and (3) small cap. Large cap companies are the top 100 listed companies on the stock exchange (NSE/BSE). Midcap companies are 101st to 250th companies in terms of market capitalization. Small cap companies are all companies below the 250th company in terms of market capitalization.
What is market capitalization?
Market capitalization is the total value of all of the shares of a listed company denoted often by the formula: Market capitalization = current value of a share of the company * total number of outstanding shares of the company.
What are large-cap funds?
Large-cap mutual funds are a category of equity mutual fund that invest at least 80% of their corpus in top listed 100 companies by market capitalization. These 100 companies are typically leaders in their fields of business. Historically, large-cap companies have delivered stable returns and have a greater capacity to resist economic uncertainty. These are considered suitable for conservative investors who wish to build wealth without exposing their capital to a great deal of volatility.
Benefits of large-cap funds
As a result of solid financial standing and competent business plans, the growth, revenue production, and income of the top 100 companies are consistent and stable. Therefore, the likelihood of large-cap companies facing insolvency owing to economic conditions is fairly low. They are generally less affected by market swings as compared to mid-cap and small-cap companies and hence provide portfolio stability. Additionally, these companies distribute dividends, which contribute to the investor's stable accumulation of wealth.
Large-cap mutual funds invest in blue-chip companies with a reputation for good performance, sound financials and reliable earnings, so their stock values are considered less volatile. As a result, companies are in a better position to provide investors with capital appreciation over time.
Since large-cap companies are well-established and have been operating for years, collecting information about their operations, financial statements, and profitability is fairly easy. This transparency makes it simple for investors to examine the data and determine whether the stock is worthy of investment.
Another advantage of large-cap stocks is their high liquidity in the stock market. Therefore, it is simple to unwind the entire portfolio in a bear market without affecting prices or creating a big loss. This can be crucial during periods of volatility. Therefore, fund managers of large-cap funds can acquire and sell large-cap stocks whenever necessary to maximise profits.
Large-cap stocks have the capacity to withstand numerous market cycles' ups and downs. They can not only prosper during a bull market but also withstand market volatility in a bear market. It is relatively a secure investment vehicle that can withstand an economic downturn and recover rapidly without jeopardising future prospects.
Large-cap funds invest majorly in the top 100 companies of India in terms of market capitalization. These companies form the foundational plank of the Indian economy. However, being an equity fund, there is a certain degree of risk involved with an investment in large-cap mutual funds. When compared to mid-cap and small-cap mutual funds they are considered less risky in the long term.
Therefore, large-cap equity funds are appropriate for the pursuit of long-term wealth appreciation. As an investor, you can benefit from the consistent returns of these funds while exposing your portfolio to a relatively lower level of risk.
You can invest in these funds for planning expenses such as your children's college education, their weddings, and your retirement. If you are a novice investor seeking reasonably secure exposure to the equity markets, this strategy is suitable for you. However, you must be mindful of the fact all investments in mutual funds are subject to market risk.
Kuvera is a free direct mutual fund investing platform.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.