1. How do Large-cap Equity Funds work?
Large-cap equity funds is a type of mutual fund that invests a larger proportion of their corpus in companies with large market capitalization. Large-cap companies are well-established players with a good track record and vintage and they typically have strong corporate-governance practices. Having generated wealth for their investors slowly and steadily over a long term, these corporate houses are always among the most highly followed in the market.
Recently, SEBI’s recategorization has modified the criterion to determine whether a company is large-cap, small-cap or mid-cap. Large-cap companies are those which 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 investors who are relatively risk-averse. 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. Their endeavor is to provide better capital appreciation over a long term and distribute dividends fairly 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 market (i.e. Sensex or NIFTY). As they are financially strong, 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 prospective. 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 on account of ups and downs of 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 sturdy 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 money called an expense ratio. It appears as a percentage of average asset under management (AUM) and reflects the operating efficiency of the fund. Till now SEBI had 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 basically 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 7 years in order 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 realize 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 an exposure in the equity markets but are wary of the risks involved may build their portfolio around these funds. Having ease of investing and favorable 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 are taxed at the rate of 15%. Conversely, capital gains made on holding period of more than 1 year are called long-term capital gains (LTCG). Owing to recent changes in budget 2018, LTCG in excess of 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: Sign in at cleartax.in
Step 2: Enter your personal details regarding the amount of investment and period of investment
Step 3: Get your e-KYC done in less than 5 minutes
Step 4: Invest in your favorite 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 analyze 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, you need to keep your financial goals, risk appetite and investment horizon in mind.
The following table represents the top 5 large-cap equity funds in India based on the past 5 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 as well.
|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.
Many times investing in large-cap equity funds becomes complex. In case you don’t possess enough financial knowledge and are finding difficult it too difficult to understand, then just go for ClearTax Save. You can invest in hand-picked funds in a hassle free and paperless manner.