Companies having a market capitalisation of more than Rs 20,000 crore are classified under large-cap.
This article covers the following:
Large-cap mutual funds predominantly invest in companies having a large market capitalisation. Large-cap funds are known to offer consistent returns. The companies in which large-cap funds invest are generally leaders in their field of business and hence, tend to remain more stable when compared to small or mid-cap companies at times when the markets go volatile. The large-cap companies typically have a good track record in the market backed by healthy corporate governance practices.
The large-cap mutual funds offer higher returns with minimal to no risk of market fluctuations. Hence, risk-averse investors can include large-cap funds in their investment portfolio over mid and small-cap mutual funds.
Investing in large-cap mutual funds is a good option for first-time equity investors. Typically, the underlying companies of large-cap funds have a track record of performing consistently over both market highs and lows. Therefore, investors should not expect very high returns, even when the market conditions are favourable. But keep in mind that the returns from large-cap funds will be less volatile.
For all investment-related queries on large-cap mutual funds, visit ClearTax.
Large-cap funds are also subject to market risk. Investors must consider factors that may impact the performance of their investment and ultimately, the returns. Investors should keep in mind their age, risk profile, goals, and investment horizon while making any investment decisions.
Following are some of the factors that investors must analyse while investing in large-cap mutual funds.a. Know your investment objective
Check if the objectives of the fund are in line with your goals. Understand the style of fund management to know about the performance of the funds.
Analysing the past performance is crucial while deciding to invest in large-cap funds. Pick those funds that have been consistent in their numbers in all market conditions and cycles.
Fund managers, particularly in the case of large-cap mutual funds, play a definitive role in the generation of returns. Fund managers with experience and expertise will be able to move the capital in the right direction when the market looks promising.
Expense ratio impacts investors directly and includes costs such as the brokerage fee, the fee charged by the mutual fund house, and so on. Some fund houses may charge a high fee but also offer higher returns. Determine the fee, other charges, NAV, and returns.
This is a cost that investors directly incur. Despite exit load coming into the picture only at the time of redemption, you should still consider it. Exit load takes away a fraction of the NAV. Hence, the lower exit load translates into higher returns.
As an investor, you must look at specific financial ratios to evaluate mutual funds. Following are some of the important ratios to be considered:
Sharpe ratio measures the risk-adjusted return of a mutual fund scheme. If a fund has a higher Sharpe ratio, then it is considered relatively better than its peers.
Sharpe ratio = (Mean portfolio return − Risk-free rate)/Standard deviation of portfolio return
The dispersion of a set of data from its mean or average is measured through standard deviation. In finance, standard deviation indicates the volatility of an investment from its annual rate of return. A stock having a higher standard deviation will have a larger price range, which again is indicative of higher volatility in comparison to stocks with a low standard deviation.
Beta indicates a fund’s sensitivity to the correlated market movements. If a fund registers a Beta of 1.0, then it means that its volatility is precisely equal to the benchmark. If a fund has a Beta of 0.90 or less, then it means that it is 10% less volatile and if the Beta is 1.40, then it means that the fund is 40% more responsive than the benchmark.
R-Squared reflects the percentage of fund returns that fall in line with the benchmark returns. The value of R-Squared rests between 0 and 1 and is denoted as percentages from 0 to 100%. A fund with an R-Squared of 100% will have its securities’ movements explained by movements in the index. A higher value of R-squared means a more useful beta figure.
Alpha is a measure of the fund manager’s ability to make profits when the benchmark registers a profit. Alpha can be equal to 1.0 or even less or more than 1.0. The higher the Alpha, more is the ability of the manager to generate profits from the benchmark movements.
Because of their presence in the market for many years, investors can access their profitability and financial details for a course of time to assess their performance before making any decisions. This financial research data, when viewed alongside the history of the company and its present business activities, can help in the accurate determination of the valuation.
Investing in mutual funds can, however, be risky, and it is recommended to consult an expert. You may speak to our investment experts at ClearTax for guidance.
Investing in mutual funds can, however, be risky and it is recommended to consult an expert. You may speak to our investment experts at ClearTax for guidance.
These funds have been characterised as an ideal investment option for new investors or those that do not wish to take risks. One disadvantage of this fund is that the growth potential of underlying stocks might be limited.
The returns generated also happen to be lower than those that one gets from the small-cap or mid-cap funds. In addition to this, it is the fund manager who takes the decisions pertaining to the stocks in your portfolio, which leaves you with little or no control on the portfolio.
Based on large-cap fund performance indicator values, the following are the best large-cap mutual funds. The rankings done here are for a consolidated list of large-cap equity funds on a 3-year return basis.
Mutual funds are subject to market risk and require informed decision making. Reach out to our team of financial experts at ClearTax to gain further guidance on investing.