Large-cap mutual funds are funds that invest a majority of their corpus in the equity of the companies with large market capitalisation. These large-cap companies are the ones that are placed in the top 100 companies of the benchmark index. In simple terms, large-cap mutual funds are schemes that invest in big firms that have a high market share.
What is market capitalisation?
Market capitalisation measures a company’s value in the market. It is the total value of all the shares that are issued to shareholders i.e. value of total outstanding shares.
Market capitalisation can be calculated by multiplying the total number of shares held by shareholders and the value of each share. To understand market capitalisation in terms of mutual funds, consider this - For companies listed in the Bombay stock exchange (BSE), large-cap companies would comprise the top 100 companies with the highest values in Sensex (BSE’s benchmark index).
READ MORE: What are small caps mutual funds?
The top 100 companies of benchmark index are defined by SEBI for large cap mutual funds.
The following are the characteristic features of large-cap mutual funds:
Low risk: These funds are considered to be low-risk funds suitable for risk-averse investors or investors with a small risk appetite. As the companies constituting large-cap are one of the biggest, their market value doesn’t tend to fluctuate a lot due to market changes. Compared to companies under mid-cap and small-cap, the firms that come under large-cap also have a relatively stable Net asset value (NAV).
Low but steady returns: The investments through these funds are less volatile and the risk exposure in investment in large-cap mutual funds is low. Consequently, it has lower returns than mid-cap and small-cap investments.
Long-term: These funds are suitable for investment in the long run. As mentioned before, they are less volatile. For this reason, if one wants to enjoy a considerable gain, he/she has to invest for a long period of time.
Liquidity: Large-cap companies are well-established and reputable companies. Their stock can be easily traded in the market. For this reason, large-cap mutual funds are liquid as the assets can be sold whenever the need arises. This is another reason why this investment carries a lower risk: assets can be liquidated when there is a downward trend in their performance.
Portfolio diversification: Companies that are part of the top 100 list in their benchmarks are not restricted to one sector. Organisations from multiple markets can be invested in through these funds. Thus, large-cap mutual funds facilitate portfolio diversification.
Expense ratio: Expense ratio is the percentage of fees charged by the mutual fund investment house through which one is investing. As the investment returns in these funds are low, the expense ratio should be a factor to consider before making an investment.
Large-cap mutual fund investments are low-risk investments with steady returns. All the features of these funds must be considered carefully. It is beneficial to align one’s financial goals with an investment before finalising an investment.