Large Cap Stocks – Definition, Features and Drawbacks

What are large-cap stocks?

Large-cap companies have a market capitalisation of over Rs 20,000 crore. Moreover, they are pretty stable and can handle an economic recession better than medium and small-sized businesses. 

These are the stocks of well-established businesses that have a dominant market share. For example, TCS with market cap well over Rs eleven lakh crore is a dominant player in the IT space, while HUL with similar market cap is a big player in the FMCG industry in India.

SEBI has defined large-cap companies as the 1st to 100th companies based on market capitalisation on  India’s leading stock market indices, such as the Nifty 50 and the BSE Sensex.

Mutual Funds that invest in stocks of companies with large market capitalisation are called large-cap funds. Moreover, many large-cap companies pay regular dividends and are suitable for investors seeking passive income. The top large-cap stocks based on market cap are HDFC, HDFC Bank, TCS, Infosys, RIL, Cipla, Tata Motors, Maruti Suzuki, ICICI Bank, SBI etc..

What are the features of large-cap stocks?

Consistency:

Large-cap companies are well established and have solid financials and an excellent distribution network. Moreover, many of these companies enjoy an economic moat; a competitive advantage over rivals and peers.

Greater Analyst Coverage:

According to the Companies Act, all companies including large-cap firms must mandatorily disclose their financials. It gives opportunities for stock analysts to study the fundamentals of these companies and recommend their shares to investors.

Mutual Funds prefer large-cap stocks:

Many mutual funds invest in the stocks of large-cap companies as these firms are stable even during an economic slowdown. These stocks have higher liquidity as they are traded regularly on stock exchanges such as the NSE and BSE. 

Wealth Creators:

Many investors prefer large-cap stocks as these are wealth creators over the long run. You may consider large-cap stocks if you have a time horizon of three or more years.

Expensive:

Many investors prefer investing in large-cap stocks because of the brand value and strong distribution network of the companies they represent. It leads to a higher demand for large-cap stocks and, consequently, a higher share price.

Who should invest in large-cap stocks?

You may consider investing in large-cap stocks if this is your first time in the stock market instead of mid-cap and small-cap stocks. 

For instance, as these companies have solid financials and a strong reputation, they can efficiently handle headwinds in the economy. 

You can invest in large-cap stocks to build wealth steadily over time. For example, you can start a SIP in large-cap stocks to attain vital financial goals.

Many large-cap companies have good corporate governance as top shareholders demand adherence to a higher standard. 

What are the advantages of large-cap stocks?

• You can diversify your portfolio with large-cap stocks across sectors and industries. For example, you can choose bellwether stocks such as RIL, TCS, Sun Pharma, Maruti Suzuki, Hero MotoCorp etc. Different sectors react differently to the same market events, protecting your portfolio during volatile market periods. 

• Large-cap companies enjoy a dominant position in the market. They have low debt levels and can quickly service the interest on their short and long-term liabilities. Many large-cap stocks have a higher dividend payout ratio, stable dividend policy, lower volatility and a very high analyst coverage. 

What are the drawbacks of large-cap stocks?

• Although large-cap stocks may be stable during an economic downturn, they do not rebound as strongly as mid-cap and small-cap stocks when the stock market recovers. As mid-cap and small-cap companies focus on rapid expansion, economic tailwinds offer excellent prospects for rapid upward movement in stock prices.

• Large-cap stocks are an excellent option for a buy-and-hold strategy. However, they are not suitable for investors who want quick returns in a short period. 

• Mid-cap and small-cap stocks have the potential to give higher returns as you assume a higher level of risk. However, as large-cap stocks are relatively safer than mid and small-cap stocks, you cannot get returns similar to those during a bull market. 

Conclusion:

1. You may diversify your stock portfolio with large-cap stocks to grow your wealth over time.
2. You could invest in large-cap stocks for capital appreciation, high liquidity and stability of the investment.
3. Large-cap mutual funds invest primarily in large-cap stocks. However, many other mutual fund schemes also invest in large-cap stocks.