Large Cap Funds – Meaning, Features, Advantages and Disadvantages

What is a Large Cap Fund?

While speaking of mutual funds, one comes across the term large cap mutual funds. Some investors may be unaware of what is large-cap fund. A large cap mutual fund meaning implies equity funds that invest a larger percentage of their total assets in companies with high market capitalisation. 

Investing in large-cap mutual funds offers stable returns over the long term compared to mid-cap and small-cap funds.

What is Large Cap Mutual Fund SEBI Regulation?

As per Securities and Exchange Board of India (SEBI) regulations, large-cap funds have to mandatorily invest 80% of their assets in the equity shares of the top 100 high-market capitalisation companies.

Market capitalisation or market cap refers to the market value of a company’s outstanding shares. High market capitalisation organisations have a strong market reputation and a proven track record of generating wealth for investors over the long run.

Different types of Market Cap in Mutual Funds

The different types of market caps in mutual funds are:

Large Cap Meaning – Market capitalisation of Rs. 20,000 crores or more

Mid Cap Meaning – Market capitalisation between Rs. 5,000 crores – Rs. 20,000 crores

Small Cap Meaning – Market capitalisation below Rs. 5,000 crores.

Who should invest in Large Cap Mutual Funds?

Large-cap mutual funds are suitable for investors who require steady returns over the long term and have a low-risk appetite. Such investors look for stable capital increases through equities investment but do not want to take high investment risks.

However, for investing in large cap funds, investors should have an investment horizon of at least 5- 7 years to get consistent returns.

What is Large Cap Fund Taxability?

The taxability of large cap funds is similar to other equity mutual funds. When a large cap is held for less than one year, they are taxable as short-term capital gains with a tax rate of 15%.

If the large cap funds are held over 12 months, they are taxable as long-term capital gains of 10%. Also, yields up to Rs. 1 lakh on the sale of large cap mutual funds are completely exempt from tax.

What is a Large Cap Risk Level?

Investors prefer large cap funds as they provide stable returns and steady growth with moderate risk across equity funds compared to mid-cap and small-cap funds. For instance, during market volatility, large cap fund returns get impacted with a lower margin helping the funds maintain stability compared to other equity funds.

So, a large cap fund’s Net Asset Value (NAV) fluctuates less aggressively compared to the benchmark of small caps and midcaps.

What is a Large Cap Feature?

Best large cap funds have features as stated below:

• Large cap funds or blue chip mutual funds are equity funds that predominantly invest in equities of blue-chip companies compared to other securities. A blue chip company has a good reputation and brand presence, with reliable and quality stocks.
• As a large-cap gets invested in blue-chip equities, they are easily traded. There is thus greater liquidity with large-cap funds owing to easy cash flow available on the regular sale and purchase of these equities.
• Large cap funds deliver stable and consistent returns over time. As there is consistent trading of blue chip company stocks, rapid fluctuations rarely happen in such stocks. There are no instant highs in stock prices, but the stocks do not plummet easily. So, the best blue chip fund would provide steady returns.
• Owing to their stable and steady nature, high liquidity and moderate large cap mutual fund meaning imply they are secured equity investments than mid-caps or small-caps.

Advantages of Large Cap Mutual Funds

The best large cap fund offers the below advantages.

1. Stable and Consistent Returns

A large cap fund meaning implies that such funds offer stable and steady returns to investors over time. It is because the funds are majorly invested in companies with better track records and market reputations. 

These funds are rarely impacted by market downturns, thus offering stability to your mutual fund portfolio.

2. Steady Wealth Generation

A large cap mutual fund house ensures regular dividend payments to its investors, which helps in the steady generation of wealth over the long term.

3. Higher Capital Appreciation  

Large-cap funds invest in blue-chip companies for their high performance and consistent returns. As such, stock prices of such companies rarely fluctuate, resulting in better capital appreciation for investors in the long run.

4. Informed Investment Decision:

Large-cap companies have proven track records with solid market reputations. As an investor, you easily gain all information about their operations, financial statements and related data.

So, investing in large cap funds gives an investor transparency making the investment worth the effort.

5. Low Risk

Investors with a low-risk appetite can gain from investing in large cap funds as these funds offer moderate risk compared to midcaps and small caps.

6. High Liquidity

Large-cap funds invest in equities of blue chip companies, so they are easily tradeable. You or fund managers can buy and sell large cap mutual funds whenever required to optimise your returns.

7. Diversification

You can quickly diversify your portfolio by investing in large cap funds.

Disadvantages of Large Cap Mutual Funds

• You cannot accept high returns from a large cap fund in a growing or bull market scenario.
• Returns are less compared to small caps and mid caps.
• Not suitable for a short-term investor.

Things to consider while investing in Large Cap Mutual Funds

Key factors to consider while investing in the best large cap mutual funds:

• Risk and return ratio of large cap funds
• Consistency of the scheme over the last three years
• Only long-term investors should consider large cap mutual funds
• Asset size of the large-cap scheme
• Long-term Investment goals and amount to be invested
• Capital Gains Tax and Dividend Distribution Tax
• Understand large-cap fund meaning with respect to investment risk, including downside risk
• Mean rolling returns for the last three years

How to evaluate Large Cap Mutual Funds

You can evaluate the best large cap mutual funds based on their

• Risk and return capability
• Expense ratio
• Performance of large cap fund and fund manager
• Cost of the fund
• Diversification attribute of the fund

Conclusion

Large-cap funds mean equity-oriented funds that provide a higher and more consistent return over time than small-cap and mid-cap funds. It is good to have exposure to large caps in your portfolio for a balanced and stable portfolio.

A blue-chip fund is always a safe investment bet for the long term.

FAQs

1. Are large-cap funds safe?

Large-cap funds invest in companies with a higher market capitalisation and a proven track record.

These companies have greater market visibility and brand presence. So, it is generally considered safe to invest in large cap funds from a long-term investment perspective for earning stable returns and dividends.  

2. What are the ways to redeem a large cap fund?

Ways to redeem a large cap fund are:

• Directly through an asset management company, either online or offline
• Through your trading or Demat account
• Through an agent or distributor offline