Large Cap Funds: BUILDING BLOCKS FOR YOUR INVESTMENT PORTFOLIOS

By: Daksh Chansouriya | 24 April, 2024

In the vast universe of investment options, large cap funds stand out as a cornerstone for those seeking stability in their portfolios.

These funds invest in companies that are industry leaders and financially stable that come together to offer investors both reliability and the potential for growth.

What are Large Cap Funds ?

Large cap funds are a category of mutual funds or exchange-traded funds (ETFs) that primarily invest in companies with significant market capitalizations.

These are often well-established companies with strong histories of performance, widespread brand recognition, and substantial market shares in their respective companies.

In essence, large cap funds focus on industry leaders and established players.

According to SEBI, large cap companies fall in the top 100 of the list of companies according to market capitalisation. Hence, investing in these companies is considered to be less risky and steady.

How Does a Large Cap Mutual Fund Work ?

By now, you know that large cap funds invest in big organisations. These schemes try to offer regular dividends and capital appreciation in the long term.

If you are a risk-averse investor but want to benefit from equity investments, then large cap equity funds are the best option available to you.

Since these schemes invest in financially strong large cap companies, they can withstand a slowdown in the markets. However, the returns are lower compared to mid-cap or small-cap funds.

In the long term (around five to seven years), these funds tend to offer good capital appreciation. However, before you start investing, ensure that you consider your investment objectives and risk tolerance apart from the long-term investment horizon.

How Should You Invest in a Large Cap Mutual Fund ?

Investing in mutual funds with InvestMentor is a breeze. Simply open a demat account and complete a quick KYC process to get started. This easy two-step process allows you to begin investing in a diversified portfolio of mutual funds.

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Why should you invest in Large Cap Mutual Funds ?

Large Cap Mutual Funds carry varied sets of benefits for the investor. Some of them are as follows :

1. Stability in Turbulent Times: One of the key attractions of large cap funds is their stability. These funds often invest in companies that have weathered economic storms and demonstrated resilience over time.
2. Growth Potential: While large cap funds are synonymous with stability, they are by no means stagnant. Many of the companies held within these funds continue to innovate, expand, and generate substantial returns for investors.
3. Diversification and Risk Management: Large cap funds often include a diversified portfolio of companies spanning various industries and sectors. This diversification helps mitigate risk by spreading investments across different market segments.

Considerations for Investors:

1. Financial Goals and Risk Tolerance: Align investments with long-term financial goals and risk tolerance.
2. Fees and Expenses: Evaluate the fees and expenses associated with large cap funds to ensure they align with expected returns.
3. Fund Manager Track Record: Assess the track record and expertise of the fund manager in navigating diverse market conditions.

Taxation Rules of Large Cap Mutual Funds

Being equity funds, large cap mutual funds are subject to capital gains tax and dividend distribution tax.

Capital Gain Taxes

• On redeeming the units of a large cap equity fund, you earn capital gains – which are taxable. The rate of tax depends on the holding period – the period for which you were invested in the fund.
• The Capital gains earned by you for holding a period of up to one year = Short Term Capital Gain (STCG), which is taxed at 15%
• The Capital gains earned by you for a holding period of more than one year = Long Term Capital Gain (LTCG). LTCG up to 1 Lakh is not taxable. Any LTCG above this amount is taxed at the rate of 10% without indexation benefits.

Dividend Distribution Tax

• When a fund house pays a dividend, it needs to deduct DDT of 10% at the source before making the payment.

CONCLUSION

Large cap funds represent a cornerstone in the landscape of investing, offering investors a blend of stability, growth potential, and diversification.

By utilising the strength and resilience of established market leaders, these funds provide a pathway to navigate volatile market conditions while capturing opportunities for long-term wealth creation.

Whether seeking stability amidst uncertainty or capitalizing on the enduring success of industry giants, large cap funds serve as a blueprint for building resilient and prosperous investment portfolios.