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What is Large Cap Fund? Advantages of Large Cap Fund

IndianMoney.com Research Team | Posted On Friday, March 06,2020, 04:19 PM

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What is Large Cap Fund? Advantages of Large Cap Fund

 

 

Equity funds invest in the shares of companies. The profit or loss accrued on the investment is transferred to the investor. Based on the size of the company in which the fund invests, they are classified into various categories. One such category is called the large cap fund.

What are Large Cap Funds?

Large cap funds are mutual funds that invest a large portion of their corpus in companies with high market capitalization. Capitalization is an indication of a company’s market value. It is calculated by multiplying the stock price with the number of outstanding subscribers. Market capitalization of large cap companies are higher than Rs 20,000 Crores. These are companies with a good reputation and sound track record. Investors often go to large cap companies for steady and stable returns.

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What is Large Cap Fund? Advantages of Large Cap Fund

Things to Know While Investing in Large Cap Funds

  1. Risk: Large cap funds are moderately risky. They are highly stable compared to mid-cap and small-cap funds. Market fluctuations do not affect these funds. They are stable because of their market strength and quality of business and management. Most of the large cap companies pay out dividends. This ensures a steady income to the investors.
  2. Return: They offer stable returns. Large cap funds do not yield very high returns during market highs; rather they give stable returns at all times. Adding large cap funds to the portfolio helps ensure stable returns.
  3. Cost: Before investing in any mutual fund, you must check the expense ratio of the fund. It indicates the fee charged by the fund house to manage the assets. The upper limit of expense ratio is 2.50% as mandated by SEBI. While subscribing to an equity fund, ensure you choose a fund with low expense ratio.
  4. Investment Horizon: These funds are ideal for investors with long-term investment horizons. Large cap funds yield returns of 10% to 12% if they are held for more than 7 years. Stick for the long term to enjoy high returns.
  5. Financial Goals: Large cap funds are ideal to meet future financial goals like retirement planning, children’s higher education and so on. They are the best fit for investors with long term financial goals.

See Also: Large-Cap Fund vs Mid-Cap Fund: Which One is Good?

Why Should You Invest in Large Cap Funds?

Large cap funds have the following advantages:

  • Stable: Large cap funds invest in companies that are stable.
  • Low Risk: Due to their stability and market value, they are less risky and are rarely affected by stock market movements. They may outperform in a bearish market.
  • Dividends: Dividends are an additional benefit of investing in large cap funds. Along with returns, these companies pay dividends to the investors.

See Also: Things You Must Know About Equity Investing

How Large Cap Funds are Taxed?

There are two sources of revenue from a large cap fund: Capital gains and dividends. Capital gains are taxed in the hands of the investor, whereas, tax on dividends are paid out by the fund house before transferring them to the investor.

Capital Gains: Capital gains are profits from funds. This profit is taxed based on the tenure of the fund. If the fund tenure is less than a year, then capital gains are taxed at 15%. If they have tenure of more than one year, then gains are taxed at 10% on gains which exceed Rs 1 Lakh.

Dividend distribution tax (DDT): DDT is paid by the Companies before paying dividends to shareholders. Now, DDT has been abolished. Dividend is taxable in investor’s hands where Dividends above Rs 10 Lakhs are taxed at 10%.

Risks of Investing in Large Cap Fund

Low Returns: Though large cap mutual funds are a stable source of investment, they generate low returns.

Lack of Opportunity: These funds cannot take advantage of market changes to a large extent.

See Also: Different Types of Mutual Funds

Less Ownership: Shareholders enjoy ownership in the company. However, when it comes to large cap funds, your investment will be only a small portion, and hence less ownership and power.

Top 5 large cap fund 2020

Fund Name

1 Year Return (%)

3 Year Returns (%)

5 year Returns (%)

MIRAE asset large cap fund

15.98

16.09

12.50

Axis Bluechip fund

23.34

21.50

11.93

ICICI prudential Bluechip fund

12.02

13.39

9.42

SBI Bluechip fund

14.55

12.21

10.48

Nippon India large cap fund

9.55

14.39

9.17

Conclusion:

Large cap mutual funds are a safe and stable investment which can be selected by investors with long term financial goals. Ensure the fund house and fund manager are strong with a good track record. Selection of stocks depends on these factors, and it largely influences the fund’s overall performance.

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