What Is a Large-Cap Mutual Fund?
If you are thinking about investing in mutual funds for the first time, large-cap funds can be a very good option. These funds have proved to be excellent wealth creators in the long term. The ‘cap’ in large-cap funds refers to market capitalisation. Large-cap funds have been both steady and sustainable in terms of generating returns and have endeared themselves to investors.
How to Calculate Market Capitalisation
Market capitalisation, or market cap, is a measure of a company’s total market value and is used to classify companies into large-cap, mid-cap, or small-cap categories. It is calculated by multiplying the total number of outstanding shares of a company by the current market price per share. For example, if a company has ₹10 crore outstanding shares and the market price per share is ₹100, the market capitalisation would be ₹1,000 crore. This figure helps investors assess a company’s size, risk level, and potential for growth.
Let us understand large-cap mutual funds better.
What Do Large-Cap Mutual Funds Do
Large‑cap mutual funds invest at least 80% of their assets in stocks of the top 100 companies by market capitalisation, as defined by the Securities and Exchange Board of India (SEBI). The minimum market‑cap threshold to qualify as a large‑cap stock has risen to around ₹1 trillion. These funds typically include well-established companies like Reliance, TCS, HDFC Bank, and L&T.
Although considered less volatile than mid- and small-cap funds, large‑cap equity schemes still carry equity market risk. They are suitable for medium-to-long-term investors (5+ years), offering a blend of capital appreciation and dividend income. The average 5-year annualised return for large‑cap funds currently stands around 17.8%.
Fund managers may allocate up to 20% of the portfolio to mid or small-cap stocks to enhance returns. In volatile markets, large‑cap funds continue to be recommended as a stable core component of portfolios, with leading funds managing assets upwards of ₹60,000 crore, reflecting investor confidence in this category.
Size Matters
Mutual funds pay attention to how big a company is. In this case, size does matter and it has an impact on the investment made. Large-cap fund investments carry certain advantages and disadvantages that are unique to them.
There are a number of reasons why large-cap companies are picked up by mutual funds. Some of these are listed below:
- Trusted reputation and financial strength:
Large-cap companies are generally well-established industry leaders with strong brand value and consistent financial performance. Their stable revenue streams and proven business models reduce the risk for mutual fund managers. These companies often have low debt levels and ample cash reserves, which allow them to weather economic downturns better than smaller firms.
- Established market presence and track record:
These companies have operated for many years, often decades, and have demonstrated the ability to sustain and grow through various market cycles. Their long history offers valuable insights into how they manage risks, navigate regulatory changes, and respond to competition, giving investors like you more confidence in their stability.
- Strong corporate governance:
Due to their size and regulatory scrutiny, large-cap companies typically have well-structured boards, clear reporting mechanisms, and compliance with transparency norms. This reduces the chance of fraud or mismanagement and assures investors that their money is being handled ethically and professionally.
- Long-term wealth creation:
Large-cap stocks may not deliver explosive short-term gains, but they provide steady capital appreciation over time. They are ideal for conservative investors seeking gradual growth with relatively lower volatility. Dividends and reinvested profits also add to the compounding effect.
- Plenty of available research and analyst coverage:
These companies are widely followed by financial analysts, institutions, and media, providing investors and fund managers with regular updates and in-depth analysis. This abundance of information allows fund managers to make informed decisions, reducing guesswork and increasing the quality of investment strategies.
Advantages of a Large-Cap Mutual Fund
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Large-cap funds invest in financially stable and well-established companies, reducing investment risk.
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They offer steady and predictable returns, making them ideal for conservative or first-time investors.
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These funds have historically delivered better short-term performance, especially during volatile market conditions.
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Investors often receive regular dividend payouts, providing a consistent income stream.
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Large-cap companies are better equipped to handle economic downturns, offering greater resilience during bear markets.
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These funds support long-term financial growth with relatively low volatility.
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They are suitable for investors with low risk tolerance looking for a stable and secure investment option.
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Stocks in large-cap funds are highly liquid, ensuring ease of buying and selling.
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The companies included are usually well-researched, with plenty of data available for analysis and informed decision-making.
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They provide a reliable foundation for a diversified investment portfolio, balancing risk and return effectively.
Disadvantages of a Large-Cap Mutual Fund
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Limited growth potential compared to mid- and small-cap funds due to investment in already established companies.
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May underperform in bull markets when smaller companies typically deliver higher returns.
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Returns can still be affected by broader market volatility, despite strong fundamentals.
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Dividend payouts may be lower during economic slowdowns or uncertain times.
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Not suitable for aggressive investors seeking faster capital appreciation.
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Conservative investment strategy may lead to lower overall returns in a high-growth market cycle.
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Less flexibility in portfolio reallocation due to focus on top 100 companies.
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May experience slower NAV growth in booming sectors dominated by smaller firms.
How Large-Cap Funds Differ from Small-Cap or Mid-Cap Funds
| Parameter | Large-Cap Funds | Mid-Cap Funds | Small-Cap Funds |
|---|---|---|---|
Market Capitalisation Range | Top 1 to 100 companies | Companies ranked 101 to 250 | Companies ranked 251 and below |
Risk Level | Low to Moderate | Moderate to High | High to Very High |
Return Potential | Steady, consistent returns | Higher returns in bull markets | Highest growth potential during bull markets |
Performance in Bull Market | Stable performance | Generally performs well, as mid-sized companies expand | Tends to outperform both large- and mid-cap funds |
Performance in Bear Market | More resilient, less volatile | May underperform due to moderate financial cushion | Highly volatile and may suffer heavy losses |
Growth Phase | Mature companies with stable earnings | Expanding companies with scalable business models | Small companies with aggressive growth plans |
Suitable For | Conservative investors, focused on long-term financial growth | Investors with moderate risk appetite | Investors with high risk appetite and long-term horizon |
Volatility | Lowest among the three | Moderate | Highest |
Dependence on Economy | Less sensitive | Moderate | Highly sensitive to economic conditions |
Things to Consider When Investing in Large Caps
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Stable but Slower Growth: Large-cap companies are already well established, so while they offer stability, their growth potential is lower compared to mid- and small-cap stocks.
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Lower Volatility: These funds are less volatile during market downturns, making them ideal for conservative investors.
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Long-Term Focus: Large-cap funds are better suited for long-term goals like retirement or child’s education, as they offer consistent returns over time.
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Dividend Income: Many large-cap companies offer regular dividends, providing an additional income stream.
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Lower Risk: Since large-cap companies have proven business models and sound financials, the risk of capital erosion is lower.
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Fund Manager Strategy: The performance may vary depending on how the fund manager allocates the remaining portion (usually 20%) into mid- or small-cap stocks.
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Market Sentiment Impact: Even large-cap stocks can fluctuate in value during extreme market events or economic crises.
Bottom-line
Large-cap funds are ideal for people who are investing in mutual funds for the first time. Since 80% of the corpus of these funds is invested in large-sized companies, investments are relatively safe. Large-cap companies are presumed to be financially solid. However, the performance of a large-cap fund is heavily dependent on how fund managers build their portfolio with the remaining 20% of the corpus. If that is handled well, large-cap funds can be a great option for you.
FAQs
Do large-cap funds guarantee returns or protect capital?
No, like all mutual fund investments, large-cap funds do not offer guaranteed returns. While they are relatively less volatile than mid- or small-cap funds, they are still subject to market risks, and capital loss is possible in adverse market conditions.
How do I know if a large-cap fund is performing well?
To evaluate performance, compare the fund’s returns against its benchmark (e.g., Nifty 100 or BSE 100) and peer funds over 3- and 5-year periods. Also assess consistency, fund manager track record, expense ratio, and risk-adjusted metrics like Sharpe ratio.
Are large-cap funds affected by interest rate changes or inflation?
Yes, macroeconomic factors like interest rate changes, inflation, and geopolitical events can affect even large-cap stocks. However, large-cap companies tend to have better resilience and adaptability to such shifts compared to smaller firms.
What role does the fund manager play in large-cap mutual funds?
Fund managers play a crucial role in portfolio construction, stock selection, and risk management. Although 80% of the allocation is mandated to be in large-cap companies, how they manage the remaining 20% (and rebalance the portfolio) can significantly influence fund performance.
What happens if a company drops out of the top 100 in market cap?
If a stock in a large-cap fund falls below the top 100 market-cap list, the fund manager may rebalance the portfolio to stay compliant with SEBI regulations. However, these changes are managed smoothly and typically don’t cause abrupt portfolio disruptions.
This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in securities market are subject to market risks, read all the related documents carefully before investing. Brokerage will not exceed SEBI prescribed limit. The securities are quoted as an example and not as a recommendation. SEBI Registration No-INZ000200137 Member Id NSE-08081; BSE-673; MSE-1024, MCX-56285, NCDEX-1262.
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