1. How do Large-cap Equity Funds work?
Large-cap equity funds invest a considerable part of its portfolio in companies grouped under large market capitalisation. Large-cap companies are well-established players with a good track record and vintage, and they typically have stable corporate governance practices. These corporate houses are always among the most highly followed in the market. They have generated wealth for their investors slowly and steadily over the long term.
Recently, SEBI’s re-categorisation has modified the criterion to determine whether a company is large-cap, small-cap, or mid-cap. Large-cap companies are those that fall in the top 100 ranks of the given benchmark. As compared to small-cap and mid-cap funds, these funds are less risky and may be ideal for relatively risk-averse investors. Being patient and having a long-term horizon may be a preferable investment strategy for large-cap funds.
2. Who should invest in Large-cap Equity Funds?
As mentioned above, large-cap equity funds invest in large firms. They endeavour to provide better capital appreciation over the long-term and distribute dividends reasonably regularly. Large-cap are an avenue for those who want to take advantage of equity investments but do not want their returns to fluctuate more than the benchmark (i.e. Sensex or NIFTY). As they are financially stable, they are capable of withstanding bear markets, though there’s a risk that the large-cap might underperform as compared to mid-cap or small-cap equity fund.
Hence, the objective is to keep investing when the market is down to nullify the effect of loss. By saying this, these funds are ideal for risk-averse investors who want equity exposure to high-quality stocks and have a long-term investment perspective.
Large-cap funds depend on your investment horizon and risk/return objectives – an investment horizon of five to seven years is recommended. This does not mean that these funds are immune to any downturn, but are more likely to withstand a slowdown. So to encapsulate, if you want stability in your portfolio near the redemption horizon, then large-cap funds are more suitable.
3. Things to Consider as an Investor
Large-cap equity funds are subject to market risk, although in a moderate way. Unlike small-cap/mid-cap funds, the Net Asset Value (NAV) does not fluctuate aggressively due to fluctuations seen in the benchmark. These funds provide stability to your investment portfolio, and you may think of aligning the core of your investment portfolio around them. However, under-performance during a market rally becomes the cost of out-performance during a slump.
Do not expect the large-cap equity funds to perform erratically, as these have several years of history indicating strong performance during both market lows and highs. Returns from these funds will be less volatile, which should be the draw when investing in them. Do not feel let down if these funds don’t post high returns even when the market is on the peak.
Large-cap equity funds charge a fee to manage your investment called expense ratio. It appears as a percentage of the average asset under management (AUM) and reflects on the operating efficiency of the fund. SEBI has mandated the upper limit of expense ratio to be 2.50%. Considering the relatively lower returns generated by these funds as compared to small-cap/mid-cap equity funds, a fund with a lower expense ratio and long-term holding period would help in recovering the money gone out by way of the underperformance.
d. Investment Horizon
Large-cap equity funds are suitable for individuals who have a long-term investment horizon. Usually, the fund experiences a lot of underperformance during the period of the market slump, which averages out in the long-run of more than seven years to give returns in the range of 10%-12%. Those who choose these funds need to be prepared to stick around at least for the said period to enable the fund to realise its full potential.
e. Financial Goals
Large-cap equity funds are ideal for an investor who is looking for a reasonable level of risk. These funds give stable returns and check on the erosion of fund value during the slump. You may use these funds to accumulate wealth towards retirement planning. Budding investors who are looking for exposure in the equity markets but are wary of the risks involved may build their portfolio around these funds. Having ease of investing and favourable tax treatment, investors may look at these funds as ideal investments.
f. Tax on Gains
When you redeem units of large-cap equity funds, you earn capital gains. These capital gains are taxable in your hands. The rate of taxation depends on how long you stayed invested in equity funds; such a period is called the holding period.
Capital gains earned on the holding period of up to one year are called short-term capital gains (STCG). STCG is taxed at a rate of 15%. Conversely, capital gains made on holding more than one year are called long-term capital gains (LTCG). As per the recent changes in budget 2018, the LTCG over Rs 1 lakh will be taxed at 10% without the benefit of indexation.
4. How to Invest in Large-cap Equity Funds?
Investing in large-cap equity funds is made paperless and hassle-free at ClearTax. Using the following steps, you can start your investment journey:
Step 1: Log on to cleartax.in
Step 2: Enter all the requested details
Step 3: Get your e-KYC done, it takes less than 5 minutes
Step 4: Invest in the most suitable large-cap equity fund from amongst the hand-picked mutual funds
5. Top 5 Large-cap Equity Funds in India
While selecting a fund, you need to analyse the fund from different angles. There are various quantitative and qualitative parameters which can be used to arrive at the best large-cap equity funds as per your requirements. Additionally, it would be best if you keep your financial goals, risk appetite and investment horizon in mind.
The following table represents the top five large-cap equity funds in India based on the past five year returns. Investors may choose the funds based on a different investment
horizon like 3 years or 10 years returns. You may include other criteria like financial ratios and so on.
|Fund Name||1 year||3 year||5 year|
|ICICI Prudential Value Discovery Fund||9.19||8.19||21.64|
|Kotak Select Focus Fund Regular Plan||11.98||13.28||21.59|
|Mirae Asset India Equity Fund||16.03||13.21||21.24|
|Invesco India Growth Fund||24.39||12.97||20.12|
|Franklin India Flexi Cap Fund||13.63||9.07||19.36|
**The order of funds doesn’t suggest any recommendations. Investors may choose the funds as per their goals. Returns are subject to change.
Some times, investing in large-cap equity funds can turn out to be complicated. If you are too busy to track the market movements or finding difficulty in understanding how they work, then all you need to do is contact us. You can invest in hand-picked funds in a hassle-free and paperless manner.